Vermilion Holdings Ltd v Commissioners for HM Revenue and Customs
| Jurisdiction | Scotland |
| Judgment Date | 20 August 2021 |
| Docket Number | No 4 |
| Court | Court of Session (Inner House) |
First Division
Upper Tribunal (Tax and Chancery Chamber)
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 221; [1960] TR 171; 104 SJ 563
Advocate General for Scotland v Murray Group Holdings Ltd sub nom Murray Group Holdings v Revenue and Customs Commissioners [2015] CSIH 77; 2016 SC 201; 2015 SLT 765; 2016 SCLR 485; [2016] STC 468; [2015] BTC 36
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Revenue — Income tax — Deeming provision — Whether right or opportunity to acquire securities option made available by reason of employment — Income Tax (Earnings and Pensions) Act 2003 (cap 1), sec 471
Vermilion Holdings ltd appealed against a decision of the Commissioners for HM Revenue and Customs that the grant of a share option to one of its directors was chargeable to income tax and subject to National Insurance contributions. On 8 April 2019, the First-tier Tribunal (Tax Chamber) (Judge Poon) allowed the taxpayer's appeal ([2019] UKFTT 230 (TC)). The Commissioners appealed. On 27 May 2020, the Upper Tribunal (Tax and Chancery Chamber) (Lord Ericht and Judge Dean) allowed the Commissioners' appeal ([2020] UKUT 162 (TCC)). The taxpayer appealed to the Court of Session.
Section 471 of the Income Tax (Earnings and Pensions) Act 2003 (cap 1) (‘the 2003 Act’) provides, “(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 certain conditions are satisfied.
N was a business adviser. He provided services to the taxpayer through a corporate vehicle, Q. In 2006, the taxpayer granted Q an option to acquire 2.5 per cent of the taxpayer's ordinary share capital in lieu of payment of fees for N's services (‘the 2006 Option’). By late 2006, the taxpayer was in serious financial difficulty. In 2007, a rescue plan was devised to allow for an injection of capital into the taxpayer on certain terms and conditions. One condition was that N was appointed as a director of the taxpayer. Another condition was that Q's share option was diluted. In May 2007, N was appointed as a director of the taxpayer. In July 2007, the 2006 Option was cancelled and a fresh option was issued to Q allowing it to acquire 1.5 per cent of the taxpayer's ordinary share capital (‘the 2007 Option’). In 2016, the 2007 Option was novated to N in anticipation of the taxpayer being sold. The 2007 Option was exercised following on the sale. That exercise resulted in a payment to N. The Commissioners for Her Majesty's Revenue and Customs (‘the Commissioners’) determined that, unlike the 2006 Option, the 2007 Option was an employment related security and that the payment was subject to a charge to income tax and National Insurance contributions.
The taxpayer appealed to the First-tier Tribunal (‘FTT’). The FTT held that the ambit of the deeming provision in sec 471(3) of the 2003 Act should be limited where the artificial assumption from deeming was at variance with the factual reason that gave rise to the right to acquire the option. The FTT found that the 2007 Option was given in exchange for the cancellation of the 2006 Option, that it was not made available by reason of N's employment with the taxpayer, and that, accordingly, the 2007 Option was not an employed related security. Accordingly, the FTT allowed the taxpayer's appeal.
The Commissioners appealed to the Upper Tribunal (‘UT’). The UT held that N's employment as a director had been an operative cause of the grant of the 2007 Option, that it was made available by reason of N's employment by the taxpayer, and that it was an employed related security. Accordingly, the UT allowed the Commissioners' appeal. The taxpayer appealed to the Court of Session.
Held that: (1) the UT had been wrong to hold that the employment of N had been the cause or even a reason for the grant of the 2007 Option; the taxpayer appointed N as a director and granted the 2007 Option in order to comply with the conditions of the rescue package and to secure additional financial investment; accordingly, the 2007 Option had not been made available by reason of N's employment with the taxpayer and the terms of sec 471(1) of the 2003 Act had not been met (per Lord Malcolm, para 50–54, Lord Doherty, paras 69, 70); (2) if a literal interpretation of a deeming provision would lead to injustice or absurdity, the application of the statutory fiction should be limited to the extent necessary to avoid such injustice unless such application was clearly within the purposes of the fiction (per Lord Malcolm, para 56); (3) Parliament did not intend that tax would be payable on the basis that something should be deemed to have occurred by reason of employment when it had been established that employment was not a reason for it and, as such, the deeming provision in sec 471(3) of the 2003 Act was not a separate and distinct route to taxation where it had been established that sec 471(1) did not apply (per Lord Malcolm, paras 59–61); (4) on a realistic view of the facts, the 2007 Option was granted in return for the 2006 Option being given up and so no right or opportunity to acquire something was being made available to N by the taxpayer or at least by the taxpayer as N's employer and so the deeming provision in sec 471(3) of the 2003 Act was not triggered (per Lord Malcolm, paras 55–61, Lord Doherty, paras 64, 65); and appeal allowed.
Dissenting (per Lord President (Carloway)) that: (1) the purpose of the deeming provision in sec 471(3) of the 2003 Act was to avoid disputes in which there was an argument about whether the right to acquire an option was available “by reason of an employment” where an option was “made available by a person's employer”; (2) the 2007 Option had been granted at a time when N was an employee of the taxpayer and it was therefore deemed to be made available by the taxpayer as N's employer; (3) that result followed from the plain and ordinary meaning of the wording of the deeming provision in its statutory context (paras 42, 43); and (4) the UT's analysis of the facts had been accurate: it was N's employment with the taxpayer that enabled him to enjoy the option and, accordingly, applying the words of sec 471(1) of the 2003 Act, the option had been made available by reason of N's employment (paras 44, 47).
Fowler v Revenue and Customs Commissioners [2020] 1 WLR 2227 applied.
The cause called before the First Division, comprising the Lord President (Carloway), Lord Malcolm and Lord Doherty, for a hearing on the summar roll, on 5 May 2021.
At advising, on 20 August 2021—
Lord President (Carloway)—
[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 per cent of their equity to one of their directors was an employment related securities option in terms of sec 471 of the Income Tax (Earnings and Pensions) Act 2003 (cap 1), 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 sec 471 and the...
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