Compensation for loss of share rights was taxable

The taxpayer was employed as an IT specialist in a UK company. He was granted share options in his employer’s US holding company but that company was taken over before the share options could be exercised. He was not offered share options in the acquiring company. A payment was made to him representing what was described as a ‘notional share gain’ representing the value of the lapsed options.

Initially employee’s National Insurance was deducted from this amount under a joint election made under Contributions and Benefits Act Sch 1 para 3B but after taking further advice the company changed the basis of payment to reduce the gross amount and not deduct National Insurance – the end result was that the employee received the same net amount.

The employee argued that what he received was a voluntary payment unconnected with the loss of share rights. He was therefore entitled...