Appeal Under Section 13 Of The Tribunals, Courts And Enforcement Act 2007 By Vermilion Holdings Ltd Against The Commissioners For Her Majesty's Revenue And Customs
| Jurisdiction | Scotland |
| Judge | Lord President,Lord Malcolm,Lord Doherty |
| Neutral Citation | [2021] CSIH 45 |
| Date | 20 August 2021 |
| Docket Number | XA44/20 |
| Court | Court of Session |
| Published date | 20 August 2021 |
FIRST DIVISION, INNER HOUSE, COURT OF SESSION
[2021] CSIH 45
XA44/20
Lord President
Lord Malcolm
Lord Doherty
OPINION OF LORD CARLOWAY, the LORD PRESIDENT
in the appeal under section 13 of the Tribunals, Courts and Enforcement Act 2007 by
VERMILION HOLDINGS LIMITED
Appellants
against
THE COMMISSIONERS FOR HER MAJESTY’S REVENUE AND CUSTOMS
Respondents
______________
Appellants: Simpson QC, Gilson Gray LLP
Respondents: Ghosh QC, R MacLeod; Office of the Advocate General
20 August 2021
Introduction
[1] The appellants challenge the decision of the Upper Tribunal (Tax and Chancery
Chamber), dated 27 May 2020, that the grant of an option for 1.5% of their equity to one of
their directors was an employment related securities option in terms of section 471 of the
Income Tax (Earnings and Pensions) Act 2003, and thus chargeable to income tax and
subject to national insurance contributions. The UT reversed the decision of the First-tier
Tribunal dated 8 April 2019. The appeal raises a sharp question about the application of
section 471 and the deeming provisions of sub-section 471(3) in circumstances in which,
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according to the appellants, the option had simply replaced an earlier one which, it was
accepted, had not fallen within the section.
Section 471
[2] The Income Tax (Earnings and Pensions) Act 2003 provides:
“471 Options to which this Chapter applies
(1) This Chapter applies to a securities option acquired by a person where the
right or opportunity to acquire the securities option is available by reason of an
employment of that person....
…
(3) A right or opportunity to acquire a securities option made available by a
person’s employer, … is to be regarded for the purposes of subsection (1) as available
by reason of an employment of that person unless…”.
Facts
[3] Vermilion Software Ltd was incorporated in 2003 by four software engineers who
had previously worked for an investment bank. They produced and marketed a software
product (a client reporting solution) to the asset management industry. Marcus Noble,
through the vehicle of his company, namely Quest Advantage Ltd, advised technology
businesses on fundraising, business growth, acquisitions and divestments. He often worked
alongside the management of a company as a director and investor. In about 2005/2006 he
was approached by Iestyn Williams, who considered that there was potential in Vermilion
Software, but they needed additional capital.
[4] In early 2006, an equity fund raising exercise took place. The appellants were
incorporated and became the holding company of Vermilion Software. Dickson Minto WS
were instructed as the appellants’ legal advisers. Quest and an accountant and business
adviser, namely Scott Carnegie, produced a business plan and a financial projection. About
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£2.5m was raised. This resulted in there being four shareholder directors with 55% of the
equity in A and B shares. There were also private equity holders of A, B and C shares and a
“consortium” group with B and C shares only. The latter two categories held the remaining
45% of the equity.
[5] Instead of rendering fees, Dickson Minto (through a nominee company) and Quest
were each granted options to acquire 2.5% of the appellants’ ordinary share capital. The
options could be exercised in certain circumstances, including the sale of the appellants. A
partner at Dickson Minto explained the reason for this to the FtT. The deal had involved
much more work than had been anticipated. The new investors did not wish their funds to
be spent on legal and advisory fees. The options were effectively payment for services
rendered “in the process of the fundraising exercise, which terminated in a successful
financing being closed out on 1 February 2006”.
[6] The option agreement between the appellants and Quest was signed by one of the
appellants’ directors and Mr Noble, as a director of Quest, on 1 February 2006. It provided
that Quest would be granted:
“2.1 … an option … to subscribe at nominal value for… such number of Ordinary
Shares as represent the Relevant Percentage (up to a maximum of 2.5 per cent) … of
the issued equity share capital ….”
No consideration was payable for the grant of the option. It could be exercised only as a
whole and within 10 years (cl 4.1 and 4.3).
[7] By December 2006, the appellants were in serious financial difficulty. Mr Williams,
who had invested as part of the fundraising exercise, initiated remedial action. He asked
Mr Noble for his view. This was that the appellants’ commercial prospects were very good,
but that the business was being poorly managed. Further investment and changes in
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Vermilion Holdings Ltd v Commissioners for HM Revenue and Customs
... [2021] CSIH 45 First Division Upper Tribunal (Tax and Chancery Chamber) No 4 Vermilion Holdings Ltd and Commissioners for HM Revenue and Customs Cases referred to: Abbott v Philbin (Inspector of Taxes) [1961] AC 352; [1960] 3 WLR 255; [1960] 2 All ER 763; 53 R & IT 487; 39 TC 82; 39 ATC 22......