The Supreme Court has delivered its verdict in a landmark £385k tax dispute, ruling in favour of HMRC. The case involved Vermilion Holdings (Scotland) Limited, which was challenging a tax bill of £385,850, comprising £285,148.76 in PAYE and £100,709.98 in National Insurance contributions.
The tax liability was linked to Marcus Noble, a software engineer and co-founder of Vermilion Software. Noble had received a share option following a rescue funding package. HMRC contended that this share option should be considered as an employment-related securities option, thereby subject to income tax.
Vermilion Holdings: Challenging the Tax Claim
This lengthy legal battle saw proceedings in the First Tier Tribunal in 2019, Upper Tribunal in 2020, and Court of Session (Scotland). However, the case ultimately reached the Supreme Court, which delivered a unanimous decision.
The crux of the case revolved around the interpretation of section 471 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA). This section determines when an option to acquire securities or shares should be treated as “granted by reason of employment,” making it subject to income tax rather than capital gains tax.
In 2006, Vermilion Holdings granted an option to Quest Advantage Ltd to acquire shares in Vermilion. However, due to Vermilion’s underperformance, the 2006 option was amended as part of a rescue funding package. This led to a new option agreement in 2007, under which Quest subscribed for a new class of shares in Vermilion, and the 2006 option expired.
In 2016, Quest transferred the 2007 option to Marcus Noble. Quest sought confirmation from HMRC that this transfer would be subject to capital gains tax, which HMRC rejected, arguing that it should be treated as income tax due to Noble’s employment as a director of Quest.
The Supreme Court ruled that section 471(3) of ITEPA 2003 applies to this £385k tax dispute case. It creates a clear rule that if an employer provides an employee with the right or opportunity to acquire a securities option, this is deemed to have been made available “by reason of the employment” of that person. The Court found that this interpretation was consistent with the statute’s language and purpose.
Significance of the Supreme Court Verdict
The ruling emphasises that applying section 471(3) of ITEPA 2003 does not lead to unjust, absurd, or anomalous results. It clarifies that if an employer makes a securities option available to an employee by contract, that option is regarded as an employment-related securities option.
An HMRC spokesperson welcomed the decision, protecting £385,000 in tax revenue and confirming that the 2007 option should be treated as an employment-related securities option.
This Supreme Court ruling in the case of HMRC v Vermilion Holdings Ltd (Scotland) [2023] UKSC 37 sets an important precedent in tax law, defining when share options should be considered as employment-related and subject to income tax.
