On 8 April 2019, the First-tier Tribunal held that an option granted to a company director was not an employment-related securities option (ERSO) under the deeming provision of ITEPA 2003.
An option had been granted by a company in respect of services provided by an individual on a consultancy basis. HMRC accepted at the time that the option was not an ERSO. Subsequent to the grant of the option, that individual became a director of the company and the company refinanced. As a result of the refinance, the company granted a new (replacement) option to the now-director. When the director came to exercise the option years later, HMRC sought to tax the ensuing gain as employment income (rather than CGT).
The Tribunal took the view that the new option was not, as a matter of fact, granted by reason of employment. Recognising that this gave rise to an anomaly, given that section 471(3) of ITEPA (the deeming provision) was engaged as the new option was “made available” by the employer, the Tribunal looked for ways to limit the application of the deeming provision in this particular case. It felt able to effectively ignore the deeming provision in this case as it would otherwise be “at variance with the factual reason” behind the granting of the option or (alternatively) that when viewed “realistically” the right to acquire the new option was not made available by the company as the director’s employer.