The Supreme Court has allowed HMRC’s appeal from [2021] CSIH 45 in holding that s. 471 of the Income Tax (Earnings and Pensions) Act 2023 (“ITEPA”) did, properly interpreted, impose a liability to income tax on gains made from the exercise of a shares option by the respondent’s employee. A charge to employment tax arises under the Income Tax (Employment and Pensions) Act 2003 (“ITEPA 2003”) if either (1) a securities option is “made available” to a person (whether or not an employer) “by reason of [that or any other person’s] employment” [section 471(1)], or, (2) alternatively, (albeit with certain exceptions not relevant in the case), an employer “makes available” a securities option to an employee (in which case the option is deemed to have been “made available by reason [of employment]” for section 471(1) purposes [section 471(3)].
The Inner House considered the scope of section 471(1) and held it did not apply and further held that the deeming provisions in section 471(3) ought not to apply in circumstances where section 471(1) did not apply.
The Supreme Court, reversed the Inner House and held that correct starting point was to assess the applicability of the deeming provision in s.471(3), by virtue of which any securities option made available by a person’s employer is regarded as having been made available by reason of that person’s employment. If these deeming provisions applied, they were not somehow disapplied because they gave rise to a different answer to that given by section 471(1).
On the facts of the case, an individual had been granted a securities option before he had become a director of Vermillion but, as part of a funding rescue package, had cancelled that option and had been granted a new option after his appointment as a director of the issuing company. The Supreme Court thus held that the employer company had “made available” that new securities option to the recipient and section 471(3) applied to subject the option to employment tax. Any considerations, therefore, as to whether, as a matter of causation (which were relevant to section 471(1)), the employment gave rise to the acquisition of the option were immaterial. Neither did the deeming provision yielded an absurd, anomalous or unjust result were also immaterial. In particular, even if the application of section 471(3) gave rise to a different result to that given by section 471(1) (the Supreme Court did not decide whether section 471(1) applied), this was not anomalous etc. Deeming provisions often give rise to counterfactual results. This is their very point.
The Supreme Court’s approach not only restores the conventional approach to deeming provisions (apply the deeming to its logical conclusion unless and until the result becomes anomalous etc), it makes clear that the very nature of deeming provisions is to apply to a counterfactual world. The approach of the Inner House, that the deeming applied counterfactually was of itself anomalous, was an erroneous and rendered not just section 471(3) but all deeming provisions potentially nugatory. The scope of section 471(3) is, as a result of the Supreme Court’s decision, very wide. Potentially section 471(3) applies to fix employment tax on any securities option granted (“made available”) to any employee, even in circumstances where a large employer such as a bank, does not know that one of the recipients of a grant of securities option, is an employee. So the approach of the Supreme Court, although a welcome endorsement of the traditional approach to deeming provisions, will open up further questions still.
Julian Ghosh KC was instructed by HMRC in the Supreme Court.
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