Cancelled share options deemed taxable in fullby
Payment for cancellation of an IT specialist’s stock options was found to be taxable in full and not eligible for a £30,000 exemption as the taxpayer had hoped.
The first tier tribunal (FTT) has found that a payment for the cancellation of a taxpayer’s stock options was taxable in full, and not eligible for the £30,000 exemption under section 403 ITEPA 2003 as “a change in the earnings from a person’s employment” as the taxpayer had argued.
Peter Hemingway was an IT specialist, employed at the relevant time by Broadcom UK Ltd (Broadcom). In 2006 and 2007, he was granted options over shares in Broadcom Corporation, Broadcom’s parent company, as part of a stock option scheme made available to employees.
In February 2016, Broadcom Corporation was the subject of a takeover by Avago Technologies.
Hemingway held outstanding vested stock options at the time of the merger. Those stock options were cancelled in exchange for a cash payment.
Broadcom issued Hemingway a payslip related to a “notional share gain”. Although Broadcom issued a revised payslip following technical advice regarding the treatment of employer national insurance contributions (NIC), the payslip’s net pay of £19,549.03 remained the same.
It’s worth noting that there was a dispute as to whether employer’s NIC should have been deducted from the payment, per the terms of a joint election Hemingway had signed with Broadcom, and that this issue was considered in the employment tribunal. However, the FTT found that the deduction of employer NIC and the operation of the joint election were not significant for the purposes of this appeal.
In April 2016, Hemingway submitted a voluntary 2015/16 tax return. In August 2016, he amended that return to claim relief under section 401 ITEPA 2003, such that the first £30,000 of the gross payment was exempt from tax. This would apply were the cancellation of the share options to be treated as “a change in the earnings from a person’s employment”.
HMRC enquired into the return and subsequently issued a closure notice under section 28A TMA 1970, refusing relief. However, as the taxpayer indicated that he did not want his return to be treated as a voluntary return, HMRC’s enquiry into the return was not valid.
Second tax return
This issue was resolved by Hemingway’s lodgement of a second tax return for 2015/16 in April 2019. In November 2019, HMRC gave notice under section 9A TMA of intention to inquire into the return, and issued a closure notice in December 2019 under section 28A TMA, determining that the payment should be taxed under section 477 ITEPA. Hemingway appealed [TC08929].
The substantive issue in this appeal was whether the payment Hemingway received was taxable under section 401 ITEPA (and so subject to relief on the first £30,000 under section 403), or whether the payment was taxable under section 477 ITEPA, which would mean the payment was taxable in full.
For Hemingway to succeed in his argument, he had to show not only that section 401 applied, but that there was no chargeable event within section 476. This is because section 401(3) ITEPA specifically provides that Chapter 3 of ITEPA does not apply to any payment or other benefit if it is chargeable to income tax apart from Chapter 3 (and section 477 is in Chapter 5).
Right to participate
Hemingway argued that the payment was for the loss of his right to participate in the stock option plan, and so met the conditions to be “a change in the earnings from a person’s employment” within section 401(1)(c), which would mean he benefitted from the £30,000 exemption in section 403(1). To support this argument, he also pointed to the proceedings in the employment tribunal, which found the payment to be ex gratia.
The FTT, however, agreed with HMRC’s position that the payment was intended and was most closely connected to the loss of Hemingway’s share options, noting that Hemingway had accepted in cross-examination that he would not have received the payment had he not held the options.
The FTT also commented that the employment tribunal decision was of little assistance, as it was deciding a different issue, namely whether the payment was “wages” within the Employment Rights Act 1996.
Consequently, section 476 ITEPA took priority over section 401, meaning the payment was taxable in full.
The appeal was dismissed.
No retrospective validation
There was a secondary issue in this case. Namely, Hemingway argued that HMRC’s second closure notice in December 2019 was not valid because HMRC’s enquiry into his earlier voluntary tax return was validated retrospectively by section 12D TMA 1970.
HMRC objected to this line of argument on several grounds, and the FTT also found Hemingway’s purpose in raising the argument unclear, given that even if he were to succeed in arguing his point, there was nothing to stop HMRC from opening another enquiry and restarting the process all over again.
In any event, the FTT concluded that section 12D did not apply to validate the initial return, and Hemingway’s appeal was also dismissed on this point.