HMRC has today updated its guidance on the UK's employment-related securities (ERS) rules which can tax, as employment income, benefits arising to employees from securities deriving from their employment. For these purposes, directorships count as employment and, broadly, securities derive from employment if the right or opportunity to acquire them is, actually, available by reason of the employee's employment. On top of this factual causation test, there is a long-standing deeming provision which, essentially, says that if a security is made available by a person's employer or a person connected with the employer, it will be an ERS (unless awarded due to domestic, family or personal relationships).
As a literal reading of the deeming provision can give rise to some counterintuitive and, arguably, unfair results, there was some uncertainty as to its scope. However, last year, in the case of HMRC v Vermilion Holdings Ltd (Vermilion), the Supreme Court considered an equivalent provision (in rules relating to employment-related securities options), holding that it creates a bright line test and so should have its natural, wide meaning.
HMRC has now updated its guidance and it is clear that it is taking a hardline view on the deeming provision in both the ERS and employment-related securities options rules. HMRC view the deeming provision as the first step in assessing whether a security or option is employment-related and, only if it does not apply, is there any need to consider the second step of applying the factual causation test. This is illustrated by the example given in the guidance where a company makes a rights issue or issues warrants to its shareholders, including one of its employees. HMRC confirm that in that situation the deeming provision would apply. The issue to the employee shareholder would seem completely unrelated to their employment, but as the award is from the employer, it is taken to be employment-related.
Comment
The fact that HMRC has adopted a wide reading of the deeming provision is unsurprising given the stance it took in Vermilion and the Court's decision in that case. However, there has been some uncertainty as to how HMRC would apply it in circumstances where an award by an employer clearly has nothing to do with employment. The new guidance makes clear that HMRC will be applying a hardline approach in that situation and should further focus taxpayers' minds on reviewing their current and historic award structures for compliance with the employment-related securities and options rules in light of Vermilion.
The deeming provision applies not only where an award is made by an employer, but also where it is made available by a person "connected" with the employer. The definition of "connection" is both wide-ranging and complex, and the updated guidance is likely to increase taxpayers' focus on applying it. We have seen this being a particular concern for clients where a team member holds an employment or directorship with one entity in their structure (even if the employment or directorship is incidental) but is awarded a security by another - with the ERS rules potentially applying if those two entities are "connected".
The Supreme Court in Vermilion did confirm that a deeming provision should not be applied where to do so would produce "unjust, absurd or anomalous" results (unless the court is compelled to do so by clear language). However, it did not consider that this limit applied and did not indicate how it could ever do so in the context of the "bright line rule" deeming provision in question. However, we may see taxpayers start to explore whether, on their particular facts, a literal application could produce an unjust, absurd or anomalous result.
