IT specialist loses £30k share option relief appeal

An IT specialist has lost a First Tier Tribunal (FTT) appeal after claiming relief for compensation he received for the loss of rights under a stock option scheme provided by his employer

Max Austin, Reporter, Accountancy Daily

Peter Hemingway, the appellant, made his appeal in relation to a claim for relief under section 401 of the Income Tax Act 2003 (ITEPA) over compensation he had received for the loss of rights under a stock option scheme.

The main issue in this appeal was whether a payment received by Hemingway shortly after his employer was the subject of a merger was taxable in full as being a payment in connection with the loss of Hemingway’s share options.

Or alternatively, in respect of the loss of his employment rights and so attracting relief in the first £30,000 paid to him.

Hemingway further argued that the relevant closure notice was not valid because the enquiry into an earlier voluntary tax return submitted by him was validated retrospectively by section 12D Taxes Management Act 1970.

HMRC submitted, however, that the original return was the subject of a final decision by the FTT and the retrospective effect of section 12D disapplied by section 87(4) Finance Act 2019.

Hemingway was an IT specialist employee at the relevant time by Broadcom UK Ltd. On 2 June 2006 and 3 May 2007, he was granted options over shares in Broadcom Corporation, Broadcom’s parent company, as part of its stock option scheme made available to employees.

In May 2015, a takeover of Broadcom Corporation by Avago Technologies was announced. Hemingway was later informed that all stock options would be cancelled for a cash payment.

Broadcom then issued a payslip to Hemingway showing gross earnings of £35,228.15 which were described as ‘notional share gain’. From that amount, £15,679.12 was deducted making a net pay of £19,549.03.

This ultimately led to Hemingway making a formal grievance complaint on 5 February 2016 because of employer national insurance contributions (NICs) deductions.

On 22 April 2016, Hemingway submitted a voluntary tax return in respect of tax year 2015-16 reporting the Payment as taxable income (the initial return).

HMRC then opened an enquiry into the initial return under section 9A TMA, and later issued a closure notice totalling £16,240, refusing Hemingway relief under s401 ITEPA.

S401 ITEPA applies to ‘payments and other benefits which are received directly or indirectly in consideration of the termination of a person’s employment, a change in the duties of a person’s employment, or a change in the earnings.’

At the Tribunal, Hemingway accepted that the payment had been made in the course of his employment and that Broadcom purported to make the payment in connection with the loss of the share options.

However, under the terms of the share option plan agreements, Hemingway submitted that the change of control of his share options was cancelled for no value. The payment was a voluntary payment unrelated to the rights that ceased to exist a month earlier.

He also argued that the closure notice was invalid because the enquiry into an earlier voluntary tax return submitted by him was validated retrospectively by TMA 1970.

The FTT agreed with HMRC that s476 ITEPA took priority over s401, which provides that when a ‘chargeable event occurs in relation to an employment-related securities option, the taxable amount counts as employment income of the employee for the relevant tax year.’

Judge Ian Hyde said: ‘The appellant argued that the loss to which the compensation related was the loss of the right to participate in the 1988 plan and therefore his employment rights were varied. We accept that the point is arguable but we agree with HMRC that the payment was intended and was most closely connected to the loss of the appellant’s share options.

‘Indeed, in cross-examination, the appellant accepted that he would not have had the payment had he not held the options. The fact that Broadcom made the payment later and potentially of a different amount than that originally represented as payable does not alter the position.’

The appeal was dismissed.