On 25 October 2023, the UK Supreme Court handed down its long-awaited judgment in HMRC v Vermilion[1]. The case concerned an individual investor – Mr Noble – whose company (Quest Advantage Ltd) (“Quest“) was engaged to advise Vermilion on a turnaround strategy. The costs of the project exceeded the budget, and Vermilion granted Quest an option to acquire shares in Vermilion Holdings Limited (the “Original Option“) instead of payment for the consultancy services. A year later, a decision was made to restructure the company’s share capital. As part of the restructuring, (i) Mr Noble was appointed executive chairman of the company and (ii) the Original Option was cancelled and a new option (the “New Option“) was granted to Quest over a new class of shares that represented a lower percentage of Vermilion’s total issued share capital. Nine years later, Quest novated the New Option to Mr Noble who subsequently exercised it and submitted a non-statutory clearance seeking confirmation from HMRC that the gain realised on exercise was subject to capital gains tax, not income tax. HMRC decided that the gain was subject to income tax. Mr Noble appealed the decision and the dispute was ultimately heard in the UK Supreme Court.

What is the relevant law?

Under section 471(1) of the Income Tax (Earnings and Pensions) Act 2003 (“ITEPA“), a charge to income tax applies on the acquisition of shares on exercise of an option if the right or opportunity to acquire the option is available “by reason of” the individual’s office or employment. Section 471(3) of ITEPA extends the scope of this charge by providing that a right or opportunity to acquire the share option is “deemed” to be available by reason of an office or employment if it is made available by a person’s employer or by a person connected with a person’s employer (such as another group company). The correct interpretation of this deeming provision was the central issue in this case.

The Supreme Court decision

The Supreme Court ruled in favour of HMRC and considered that section  471(3) of ITEPA  created a “bright line” rule, namely that if a person’s employer (or a person connected to their employer) provides the employee or officer the right or opportunity to acquire a share option, then this right or opportunity is conclusively treated as having been made available “by reason” of that person’s employment (unless a narrow exclusion in respect of domestic, family or personal relationships applies). Whether the deeming provision applied depended solely on who conferred the right or opportunity – i.e. did Vermilion confer the right or opportunity to Quest (as Mr Noble’s nominee)? The Supreme Court found that the answer was yes, because Vermilion did not amend the Original Option – it cancelled it and granted the New Option which brought it within the scope of the deeming provision because at that time Vermilion was Mr Noble’s employer.

What if section 471(3) leads to an “anomalous, absurd and unjust” result?

In the 2020 case of Fowler v Revenue and Customs Comrs[2], the Supreme Court had found that a “deeming provision should not be applied so far as to produce unjust, absurd or anomalous results, unless the court is compelled to do so by clear language“. In the previous hearing of Vermilion, the Inner House of the Court of Session in Scotland had found in favour of Mr Noble on this basis and considered that on the facts, the application of section 471(3) produced an unjust, absurd or anomalous result[3] as it was the existence of the Original Option (which was granted before he become executive chairman) that enabled him to benefit from the New Option. However, Lord Hodge, delivering the Supreme Court’sjudgment, disagreed. He considered the law was clear that if an employer makes available to an employee a share option, that option will be treated in the employee’s hands as an employment-related security and any related gains should be taxed as employment income. The employer’s reason for granting the option is not relevant.


The case is an important reminder of the very wide scope of section 471(3) and the unexpected income tax, and possible National Insurance contributions and PAYE obligations, that may arise when implementing similar arrangements that involve shares or share options granted to UK employees and officers.

On the basis that, in most cases, it is accepted that shares and share options granted to employees are by reason of employment, this decision is perhaps most likely to impact founders, non-executive directors and directors who have acquired (or consider that they have acquired) securities in their capacity as an investor.

It is not all bad news for taxpayers though. Whilst the Supreme Court decision confirms that, if an employer confers a right or opportunity to acquire the securities, there is potentially limited scope to avoid a charge under section 471(3), it does not overrule the principle that this provision should not be applied in a way that would produce unjust, absurd, or anomalous results. This is of course a factual question, which needs to be very carefully considered before implementing an arrangement which could fall within the scope of the deeming provision. It should also be borne in mind that a challenge from HMRC is not the only risk – the issue is also likely to be raised by a potential buyer or investor on a diligence exercise.  

How we can help Please reach out to us if you would like to discuss how the issues raised by the Vermilion case may impact your current or future share and share options arrangements. We have extensive experience with the design, implementation and operation of employee share based incentive arrangements, including the related tax, company, regulatory, trust and securities laws. We provide clients with a comprehensive and rounded multi-jurisdictional expertise, with a particular focus on management incentive plans adopted by the portfolio companies of companies with a financial sponsor.

[1] Commissioners for His Majesty’s Revenue and Customs (Appellants) v Vermilion Holdings Ltd (Respondent) (Scotland) [2023] UKSC 37

[2] Fowler v Revenue and Customs Comrs [2020] UKSC 22

[3] Vermilion Holdings Ltd (Appellants) v Commissioners for Her Majesty’s Revenue and Customs (Respondent) (Scotland) [2021] CSIH 45