Last year, HMRC won a landmark case regarding whether employee share options were to be treated as employment-related. The decision in this case went against how most in the advisor community sought to apply the Employment-Related Securities (“ERS”) rules. Last month, HMRC has updated its guidance on the ERS rules to explain the ruling in the case.
What are the ERS rules?
Broadly, the ERS rules include both a causal test and a deeming provision to determine whether the acquisition of securities is “by reason of employment”.
The causal test:
Applies the provisions of the relevant chapter to securities acquired by a person where the right or opportunity to acquire the securities is available by reason of an employment of that person or any other person.
The deeming provision:
Applies a right or opportunity to acquire securities is made available by a person’s employer, or by a person connected with a person’s employer, is to be regarded for the purpose of the causal test as available by reason of an employment of that person unless:
- the person by whom the right or opportunity is made available is an individual; and
- the right or opportunity is made available in the normal course of the domestic, family or personal relationship of that person.
This exemption from the deeming provision (set out at 1 and 2 above) is often referred to as the friends and family exemption.
What happened in the Vermilion case?
Without getting into the details of the case itself, the Supreme Court judged that share options received by the taxpayer were employment-related, solely due to the fact that they were employed by the company, and did not consider the reason by which the securities had been provided to them. The Supreme Court applied the deeming provision as detailed above, without considering the causal test.
In his judgment, Lord Hodge stated that the inclusion of the deeming provision within the ERS rules provides a “bright line rule” that will result in any security being treated as being made available by reason of a person’s employment, unless the friends and family exemption applies.
HMRC’s new guidance
HMRC’s guidance has been updated to include details of the Vermilion case and summarises how the deeming provision and casual test will be applied by HMRC moving forward.
Specifically, the guidance states “If the right or opportunity to acquire a securities option is made available by a person’s employer, or a person connected with a person’s employer, then it is an ERS option, regardless of the reason for doing so.”
It’s clear that the purpose of the deeming provision is to avoid HMRC having to determine issues of causation arising within the “by reason of employment” test. This simplifies the position for both HMRC but may lead to some unjust scenarios.
If you have any questions about the new guidance, let us know. And to stay in the loop with all the most important updates and insights from across CP, head here.
