Supreme Court finds for HMRC in Vermilion share option case

HMRC ‘win’ provides clarity for companies on the application of the deeming provision when considering Employment Related Securities

Clarity for companies when analysing ERS

The Supreme Court (SC) recently published a much-anticipated judgment finding in favour of HMRC in the appeal of HMRC v Vermilion Holdings Ltd. Whilst previous judgments in the case have focused on the facts surrounding the grant of the share option and considered whether the share option was granted ‘by reason of’ employment, this judgment solely considered the deeming rules in the employment-related securities (ERS) legislation. The ruling provides additional clarity for companies as to the tax treatment of awards and the application of the ERS legislation. This will be relevant for any director option-holders as well as any company considering paying or executive considering receiving share options in lieu of payment for services. 


The case concerns the grant of a share option to a director of Vermilion Holdings Limited (Vermilion) and the application of section 471 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA). The background details of the case are summarised in a press briefing issued by the Court.  

Previous judgments have considered the cause of the award – focusing on the meaning of ‘by reason of employment’. This has led to conflicting opinions when establishing why the share option was granted and whether or not it was made available by reason of employment.

The judgment

The SC judgment directs us to consider the ‘bright line’ rule at section 471(3) of ITEPA (the ‘deeming provision’), which broadly states that if an employer provides an employee with a security, it should be treated as having been made available by reason of employment. 

This makes it clear that where an employer makes available a securities option, it will be an ERS option and therefore subject to income tax (and possible PAYE and NIC) on exercise.

The SC advises that the deeming provision is intended to “avoid inquiry into causation”, such that the first step when considering whether a security is an ERS should be to consider who has made the opportunity or right available and not why the opportunity or right has been made available.

What does this mean for you?

Where an award of securities is made to an employee during a period of employment, we are directed by the SC to consider first who has made the opportunity available under s471(3) ITEPA 2003.

The same approach cannot be taken where an award of securities is made available to prospective or past employees. In such circumstances, the ‘bright line’ rule will not apply and instead employers will need to consider why the award was made.

The SC did leave the 'door open’ by acknowledging that there is also an exception to a literal application of a deeming rule where it would produce an unjust, absurd or anomalous result. There will be a number of cases around the fringes which may require further careful analysis.

Where employers have relied on previous judgments in this case and awards have been made to current employees or directors (including non-executive directors (NEDs)) and not treated as ERS, the tax treatment will need to be revisited. If this impacts you, or you have or intend to make awards available to prospective or past employees, please contact the authors or your usual KPMG in the UK contact to ensure that the tax treatment is considered appropriately.