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Tax Treatment of Employment-Related Share Options


In a ruling that gives useful guidance on the tax treatment of employment-related share options, the First-Tier Tribunal has rejected a taxpayer’s appeal against a substantial tax demand notwithstanding his plea that he joined his employer’s capital accumulation plan (CAP) prior to the coming into force of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA).


The taxpayer, who had worked at a senior level for a financial services company had sought to deduct his receipts from the CAP against his earnings on the basis of his non-residence in the UK at the time that distributions were made to him from the scheme. He also subsequently reclaimed the PAYE which had been deducted by the company from the CAP distribution.


Her Majesty’s Revenue and Customs (HMRC) disputed his claim and issued a tax demand in excess of £800,000 on the basis that his rights under the CAP were rights to acquire securities at a later date and therefore constituted employment-related securities options within the meaning of ITEPA.


It was submitted by the taxpayer that his CAP units had been acquired in lieu of part of his ‘guaranteed bonus’ prior to ITEPA coming into force on 1 September 2003 and that a plain reading of the relevant provisions showed that they were not intended to cover events preceding that date.


In dismissing his appeal, the Tribunal accepted HMRC’s arguments that the taxpayer had only had the rights of a ‘general unsecured creditor’ under the CAP and had acquired no immediate interest in the shares but only CAP ‘points’ which entitled him to shares at some point in the future.


ITEPA applied to any chargeable event that occurred pursuant to an employment-related securities option after 1 September 2003, regardless of when the option was acquired, and the Tribunal found that the relevant chargeable event occurred on distribution of the shares rather than the taxpayer’s entry into the CAP.


The taxpayer had elected to receive part of his prospective bonus in the form of CAP units in place of his provisional entitlement to cash and the Tribunal found that he did not have an enforceable right to the bonus which he opted out of in favour of joining the CAP. He did not, therefore, give up an ‘entitlement’ to cash at the point when he elected to join the CAP scheme.