Caselaw developments: Disposal of employment-related securities – FTT decision in Coopervision
The First-tier Tribunal (FTT) recently delivered its comprehensive judgement in Coopervision Lens Care Ltd v HMRC [2026] UKFTT 324 (TC) (Coopervision), which covered several employment related securities issues and HMRC’s assessment powers in cases where ‘reasonable care’ has not been taken by employers in reporting employment income arising from such securities.
In this article, we have sought to provide an overview of the broad findings of the FTT in Coopervision and the tax matters both prospective buyers and selling shareholders should be aware of in M&A transactions.
By way of summary, subject to the more detailed comments which follow, the key findings from the FTT decision in Coopervision are as follows:
- The FTT applied the deeming provision within the employment-related securities provisions in the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003) that shares acquired by employees or directors, where the opportunity to acquire the shares was made available by their employer, are employment-related securities by default in respect of three of the four historic acquisitions of shares by employees. This is consistent with the Supreme Court findings in HMRC v Vermilion Holdings Ltd [2023] UKSC 37.
- The FTT further considered the differential pricing between shareholder groups applied to share consideration received and ultimately followed the principles established in Grays Timber Products Limited v HMRC [2010] UKSC 4 (Gray’s Timber). The differential pricing received by employee shareholders which did not form part of the ‘intrinsic’ market value of the shares disposed of was earnings of employment as a result of being a disposal for more than market value under Chapter 3D, Part 7, ITEPA 2003 (a 3D Charge).
The FTT findings demonstrate the application of the employment-related securities provisions to the vast majority of cases where shares or other securities are acquired by employees / directors, and the continuance of the tax tribunals and the courts to maintain that differential share pricing on M&A transactions will generally be taxable employment income where the parties benefiting from the differential consideration are employee shareholders.
Background and importance
A 3D Charge can arise on the disposal of employment-related securities for more than their market value such that the difference between the consideration received and the market value of the shares is subject to tax as employment income on the relevant employee.
At the time a 3D Charge arises, as there will be a buyer in place for the shares, the shares will constitute ‘readily convertible assets’ for tax purposes which places an obligation on the employer to report any 3D Charge through their payroll filings and collect income tax and national insurance contributions from the employee (including a corresponding charge to employer’s national insurance). It is therefore important that employers are aware of the potential for a 3D Charge to arise and that where it does, amounts are appropriately reported through payroll.
What constitutes market value, and therefore the potential application of a 3D Charge, is subjective and inherently open to challenge from HMRC. In the vast majority of transactions, where shareholders either receive the same price per share, or a price is calculated in line with the Articles of Association of the company, then HMRC will generally accept that shares are sold for their market value where the price is negotiated between selling shareholders and a third-party purchaser. However, HMRC have shown through recent challenges which have been litigated at tribunal and beyond, that they will seek to challenge differential share pricing where employee shareholders ultimately receive greater value for their shares than non-employee shareholders (and such increased value is not an ‘intrinsic right’ of the shares being disposed of).
In Coopervision the company was sold in 2014 for £663m. A price of £2,850 per share was paid to the group of majority shareholders which included employees / directors and their spouses, and a price of £1,555 per share was paid to the minority shareholders (who were institutional investors).
The selling shareholders maintained that they were paid market value for their shares on the basis that the pricing had been agreed with the minority investors as different investor groups on arm’s length terms, which is the best indicator of true market value. HMRC argued the contrary on the basis that there was a single purchaser who acquired all of the shares and therefore the shares each had the same value to the purchaser, and side negotiations between shareholders are irrelevant following the principles set out in Gray’s Timber.
Key findings of the FTT
1. What constitute employment-related securities?
Under the employment-related securities provisions, all rights or opportunities to acquire shares made available to employees / directors by their employer are employment-related securities, except where the right or opportunity is made available to an individual in the normal course of the domestic, family or personal relationships of that person.
The legislation also extends the definition of employment-related securities to include shares and other securities acquired by an employee in exchange for their original securities and also to any additional securities acquired by an employee by reason of their original shareholding in the company. This aspect of the legislation does not consider the reasons for the acquisition of further securities, it is a mechanical test: if a person holds employment-related securities and then acquires further shares by virtue of that original shareholding, those additional shares will be treated as employment-related securities too.
The FTT held that three tranches of shares issued to the sellers were ‘inextricably linked to employment’, being issued as part of an overall package for the sellers to become, or continue to remain as directors and had certain leaver provisions linking them to employment. The FTT also found that conversion into loan notes, or commercial repricing of options, did not change the underlying character of the shares and they remained as employment-related securities without the chain of employment causation being broken.
However, the tribunal held that shares made available by an exiting shareholder (and therefore not the employer) which were offered to all employee and non-employee shareholders equally were not employment-related securities as there was no causal link between the share issue and the employment of the sellers. The tribunal does not seem to have considered the rule on additional securities at this point, which may be an oversight, as it is hard to reconcile their conclusions on this last tranche of shares with the legislation; it will be interesting to see whether HMRC appeals on this point.
2. What is the market value of employee shares with reference to the potential application of a 3D Charge?
The market value of the employment-related securities follows the general market value definition for tax purposes being the price a hypothetical willing buyer would pay for the rights attached to the shares.
The price agreed between individual shareholders themselves is to be disregarded where such pricing differential is not an ‘intrinsic’ right of the shares following the decision in Gray’s Timber. The market value of the shares is the value to the hypothetical purchaser and where there is a sale to a single buyer, this necessarily must take into account a price for all of the shares as they would have value to that single buyer – i.e. where the rights attaching to the shares are identical, on a pro-rata basis with consistent pricing per share.
The FTT was presented with two sets of valuation materials, an independent expert report and the valuation‑related advice prepared by the sellers’ UK tax advisers. Both sets of advice purported that the differential share pricing was the market value of the shares being sold.
However, the FTT was critical of both sets of valuation materials. In respect of the independent expert report, the FTT found that it was not supportive of the market value of the shares on the basis that it treated the allocation of proceeds among the sellers as the product of a genuine open market transaction, even though one single price had been negotiated for the entire share capital. The FTT determined that the independent expert report conflated rights attaching to specific individuals with the intrinsic rights attaching to the shares, and a number of assertions were unsupported. The FTT was similarly critical of the UK tax advisers, noting they were not acting as independent valuers, and that conclusions relied on unverified factual assumptions provided by the sellers.
The FTT concluded that a 3D Charge should arise on the basis that the market value of the employment-related securities was the value to the sole purchaser which was identical across all shareholders. The differential pricing was a result of personal shareholder dynamics and negotiation leverage which are not factors which would be considered by a hypothetical third-party purchaser.
Our comments
The FTT’s decision highlights the broad scope of the legislation and that the majority of shares issued to employees will be caught by the employment-related securities provisions, even where issued many years before a transaction. Employers should take care when issuing shares to employees / directors and implementing equity incentive schemes to ensure that all employment-related securities tax considerations are taken into account and that incentive schemes are appropriately structured from the outset. The tribunal decision makes it clear that it is not possible to ‘retrofit’ differential consideration structures where not implemented at the time the shares are issued to employees.
The Coopervision case also highlights HMRC’s continuing intention to challenge differential share pricing for employees in corporate transactions following Gray’s Timber. Care should be taken when structuring a deal to mitigate any potential employment tax risks from differential share pricing, or to identify where such issues occur and ensure that employers meet their payroll obligations and correctly report to HMRC.
In respect of valuation, the FTT’s findings in relation to the valuation materials underscore the necessity for independent valuation exercises to be grounded firmly in the hypothetical conditions of a competitive open market setting.
Valuation assumptions must be justified and the principles aligned with statute. Where valuation conclusions depend on incomplete evidence, unverifiable assumptions, or factors personal to specific individuals, the analysis will not withstand scrutiny.
How Moore Kingston Smith can help
Coopervision highlights the tax complexities and valuation issues around issuing equities to employees and directors.
Implementation of tax efficient equity reward structures
Our specialist Share Schemes and Equity Rewards team work with shareholders and management teams to ensure that effective employee share incentives are implemented in a tax efficient manner and minimise potential tax issues on a future exit.
Valuation
Our specialist Valuations team can assist with the valuation of employment-related securities on issue to employees, or on subsequent taxable events. Whilst obtaining an external valuation does not eliminate the risk of HMRC enquiry, it demonstrates a company has taken steps to discharge its obligation to perform a best estimate of PAYE liabilities at the point the shares transact.
Tax diligence
Our M&A tax team can support prospective purchasers through the tax due diligence process to provide comfort over any employment related security tax issues which may arise throughout the course of a transaction, and how any liabilities should be dealt with commercially and within the transaction pricing structure.
Sell-side tax support
Our M&A tax team can provide comprehensive tax advice throughout the deal process to selling shareholders and management teams to ensure that deals are structured in a tax efficient manner for the selling shareholders and to mitigate any employment tax issues through timely implementation of any equity incentives and efficient deal structuring.
