Last year, we reported on a case in which the First-tier Tribunal (‘FTT’) surprisingly held that the exercise of a non-approved share option by a director did not (on the facts of the case) give rise to a charge to Income Tax.
We predicted that the case would be reversed by the Upper Tribunal (‘UT’), and so it has been, in [2020] UKUT 0162 (TCC). If that were all, it would hardly be worth writing about: but in fact the UT decision is of more general relevance, reminding us as it does of the wide construction to be placed upon the phrase ‘by reason of employment’.
In 2006 Mr Noble (or, in fact, his personal company; but nothing hangs on that) was granted an option to subscribe for shares in a company. He was not at that time an employee or director: he was a corporate finance professional advising on a round of equity funding.
The company did not prosper. In fact, by January 2007 it was on the point of failure. A rescue funding package was assembled, whereunder a consortium of investors subscribed for new capital conditional on (among other things) the appointment of Mr Noble as chairman and the cancellation of the 2006 option (which was by then valueless). In its place a new option, with different terms (‘the 2007 option’) was to be granted.
However, the new option was expressly not granted in consideration of the surrender of the old: the old option lapsed and the new option was granted for no consideration. That is important: if the old option had been amended, or if it had been surrendered in consideration of the grant of the new, the tax result might (but only might) have been different.
The rescue was a success and in 2016 the company was sold and the 2007 option exercised, yielding Mr Noble a healthy gain.
The question before the Tribunals was whether the right to acquire the 2007 option was ‘available by reason of an employment [which includes directorship]’ of Mr Noble with the result that the gain on exercise was chargeable to Income Tax.
The FTT had held that as a matter of fact the 2007 option was not granted by reason of Mr Noble’s employment. It had gone on to consider whether the 2007 option was nonetheless to be treated as so granted because of the deeming provision in ITEPA 2003 s471(3). The FTT had concluded it was not. Thus no charge to Income Tax arose on the exercise of the option.
The UT considered that the question whether the 2007 option had been granted by reason of Mr Noble’s employment was a matter of mixed fact and law. Consequently, the UT was entitled to disturb the FTT’s decision if the FTT had erred in law; which, in the UT’s view, it had.
The FTT had said that Mr Noble’s directorship “was not the causa for the grant of the 2007 Option”; but that was not the right test. As was explained by Denning MR in Wicks v Firth:
“The fact of employment must be one of the causes of the benefit being provided, but it need not be the sole cause, or even the dominant cause. It is sufficient if the employment was an operative cause – in the sense that it was a condition of the benefit being granted.”
The UT observed that:
“The employment of Mr Noble and the grant of the 2007 Option are two of the conditions of the rescue package. The grant of the 2007 Option was conditional on the other conditions (including the employment of Mr Noble) being satisfied before it could go ahead. It was thus a condition of the granting of the 2007 Option that Mr Noble was employed by Vermilion. Accordingly the test set out by Denning MR was met: employment as director was an operative cause in the sense that it was a condition of the option being granted.”
The right to acquire the 2007 option was thus ‘available by reason of an employment’ of Mr Noble and the gain on its exercise was chargeable to Income Tax.
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Above all, keep well.
This article was republished in Tax Journal Issue 1491 and is also available on the Tax Journal website.