Tax Briefing: the Supreme Court’s decisive ruling in HMRC v Vermilion Holdings

Whether an option over shares is an “employment-related securities” (ERS) option can have significant tax ramifications.


The UK’s employment rated securities regime can impose income tax (at a current maximum rate of 45%) and can also trigger National Insurance Contributions, both employee contributions (usually at 2%) and employer contributions (at the current rate of 13.8%), on the difference between the market value of the option shares at the point of exercise and the price paid to exercise the option. Such liabilities are sizable, particularly when compared with the current capital gains tax rate (20%, or potentially 10%) that would apply to any value realised in respect of a share that is not subject to the ERS regime.

The extent to which an option is an ERS option turns on whether the option was made available by reason of employment or by the recipient’s employer. The law in this area was recently clarified in the Supreme Court’s landmark ruling on 25 October 2023, when it found in favour of HMRC in the appeal hearing of HMRC v Vermilion Holdings Limited.

The decision has caused some surprise among tax professionals and, while its wider applications are not yet clear, it could impact scenarios falling beyond the fact pattern of the judgment, for example the issue of founder shares or instances where shares are made available for personal or family reasons.

The facts

In 2006, Vermilion Holdings Limited (Vermilion) engaged Quest Advantage Ltd (Quest), a company owned by Mr Noble and another individual, to assist in finding investment for its next stage of growth. In exchange for these advisory services, Vermilion granted a share option to Quest (Grant 1) over 2.5% of its Ordinary share capital.

Following a period of financial difficulty, a further round of funding was provided on the condition that:

(i) Mr Noble act as director of the company, working two days a week in exchange for a salary; and

(ii) the option holding be reduced from 2.5% to 1.5%.

Instead of amending the existing option, Vermilion cancelled the existing option and granted a new one (Grant 2) over 1.5% of its ordinary share capital. The new option was granted shortly after Mr Noble had been appointed as a director. Prior to the exercise of the option, it was novated from Quest to Mr Noble.

Notably, the Grant 2 option had a ten year exercise period from the date granted (effectively renewing the Grant 1 exercise period). Had the option period not been reset, the Grant 1 exercise period would have lapsed prior to the date on which Mr Noble actually exercised the option.

The key legal issue and the Supreme Court’s decision

Under section 471 of the Income Tax (Earnings and Pensions) Act 2003 (s.471), an option is an ERS option if the right or opportunity to acquire the option is made available by reason of employment. Crucially, the section includes a deeming provision stating that any securities ‘made available by’ a person’s employer are deemed to have been made available by reason of employment.

The issue for the court was whether the Grant 2 option counted as an ERS option under s.471.

The Supreme Court considered that the purpose of the deeming provision in s.471 was to relieve the court or HMRC of the difficulty of determining issues of causation. As a result, the Supreme Court took a straightforward approach: because the right or opportunity to the option under Grant 2 was made available at a time when Mr Noble was a director of Vermilion, the option was an ERS option.


The Supreme Court’s decision clarifies the application of the deeming provision in the ERS rules.

If an option is granted (or securities are issued) by an employer to an employee, the decision suggests that within ERS rules there should never be any need to consider the factual matrix or the reason for the award. This goes against a common feature of tax law which requires consideration of the substance of a transaction.

Some potentially challenging implications of the judgment are:

1.   Founder shares

The Supreme Court’s decision potentially creates different tax outcomes in situations where founders subscribe for shares on incorporation vs where a shelf company is used.

Situations where the founders are issued with the first shares of the company would arguably not be caught by the ERS deeming provisions. This is because the company does not exist prior to the issue of the shares and therefore cannot make its shares available to the founder. Conversely, where a shelf company is used, the company clearly exists before shares are issued to founders. Therefore, the ERS deeming provisions may apply to shares issued to founders who are also directors or employees, as the right or opportunity to acquire the securities is ‘made available by’ the company.

As a planning point, there may be a benefit to founders incorporating a company rather than using a shelf company.

2.   Banks / publicly listed companies

The Supreme Court’s decision potentially widens the scope of the ERS deeming provisions to circumstances in which an employee has acquired shares on the market in its large listed employer and is then issued with further shares (e.g. on a bonus or rights issue).

It seems unlikely that HMRC will levy employment taxes in this scenario in practice but HMRC guidance would be welcomed to clarify its position on such situations following the Vermilion decision.

3.   Rights or opportunities made available by an individual for personal/family reasons

An exception from the ERS deeming provisions applies where the right or opportunity is made available by an individual for personal/family reasons. While the Supreme Court did not discuss this exception, its decision could mean that an individual wishing to pass down an interest in a company to their family member by having the company issue shares should not do so if that family member is an employee or director of the company. Previously this may have been viewed as the parent making the right or opportunity available (by telling the company to issue the family member their shares), however in light of the Vermilion decision, individuals need to make sure to transfer shares already owned by them, rather than instructing the company to issue new shares.

Given that this is a Supreme Court decision there is no prospect of appeal. It remains to be seen whether HMRC will clarify any of the broader implications of the judgment.

For further information please contact a member of our tax team.

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