CooperVision Lens Care Ltd [2026] TC09808 is a first-tier tribunal ("FTT") case in which CooperVision Lens Care Ltd ("CooperVision") appealed against HMRC determinations that PAYE income tax and national insurance contributions ("NICs") should have been withheld on amounts received on the disposal of employment related securities ("ERS") for more than market value ("MV").
Three points were considered by the FTT:
- Were the shares, which were acquired in four separate tranches, ERS?
- Were the shares (which were ERS), sold for more than market value such that Chapter 3D, Part VII, ITEPA 2003 ("3D") applied to subject the excess to income tax and NICs (rather than capital gains tax)?
- Was the HMRC determination validly made?
From a transactions tax perspective, points one and two are of most interest.
The arguments in brief
The transaction in question was the sale of the shares in CooperVision to CooperVision Holdings (UK) Ltd (the "Company"). This was a transaction between unconnected parties that was negotiated on arm's length terms. However, the proceeds of the sale were not allocated to the selling shareholders pro-rata; the three majority shareholders (two directors, plus a spouse – the "Majority Shareholders") received significantly greater proceeds per share sold than the other CooperVision shareholders (the "Minority Shareholders").
HMRC argued that all the shares held by the Majority Shareholders were ERS, and that the Majority Shareholders received more than MV for their shares. If HMRC were found to be correct, then the 'excess' proceeds received by the Majority Shareholders should be treated as employment income on which PAYE income tax and NICs should have been withheld, rather than being subject to capital gains tax.
Employment related securities (ERS)
The shares held by the Majority Shareholders were acquired in four tranches. Of these, the FTT found that the first three were ERS – these acquisitions are not considered further here.
The fourth tranche of shares (the "Fourth Tranche") was acquired in 1995 when one of the existing shareholders – a company called CLM - wished to sell their shares in CooperVision. The Majority Shareholders negotiated the sale of CLM's shares and agreed the price to be paid. However, for funding reasons, the acquisition took place in two stages. First, CooperVision bought back CLM's shares (for £3.03 each) which were then cancelled. Second, CooperVision offered the same number of shares to the remaining shareholders. The Majority Shareholders negotiated with the other shareholders of CooperVision to acquire a disproportionate number of shares such that, post-acquisition, the Majority Shareholders held more than 50% of the voting shares in CooperVision. The Fourth Tranche shares were issued part-paid such that the upfront cash cost to the Majority Shareholders was £0.25 per share.
The FTT considered whether the Fourth Tranche were ERS and held that they were not, on the basis that "on a realistic view of the facts, the right or opportunity to acquire the Fourth Shares was 'made available by' the CLM owners…. The appellants' role in issuing the Fourth Shares was essentially simply part of the mechanics."
Given the drafting of this legislation, and the findings of the Supreme Court in Vermilion Holdings v HMRC, this was a good result for the taxpayer. It would be interesting to see, if appealed, whether a higher court would take this approach given the mechanics employed involved a new issuance of shares.
Market value (MV)
Having established that some of the shares held by the Majority Shareholders were ERS, the next question was whether the Majority Shareholders received more than MV for their shares, as where ERS are sold for more than MV, the excess is taxed as employment income, rather than as a capital gain.
The argument put forward by the taxpayer was, essentially, that the price agreed for the shares was agreed between third parties, each acting in their own best interests (and on that basis, that it should be respected as MV).
The FTT agreed that this was the case in relation to the headline transaction price, but that the allocation between the shareholders, who were not independent of one another, could not be said to represent an arm's length price. This was the case even if, as contended, there was no intention for one party to gratuitously benefit another.
It is worth noting that the Majority Shareholders and their advisers considered pursuing an argument that the Majority Shareholders should rightly receive a higher price per share on the basis that they would be giving more substantial warranties and indemnities than the other sellers, making their shares more valuable. Whilst this argument was not ultimately pursued, it is interesting because we do sometimes see this approach being suggested. However, the prevalence of Warranty and Indemnity insurance in M&A transactions these days means that this argument is increasingly untenable, as the (competitive) premiums offered by insurers in this space strongly suggest that there is not material additional value in shares carrying these encumbrances.
Was PAYE correctly operated?
The question then considered was whether CooperVision had done enough to satisfy themselves that they did not need to account for PAYE income tax and NICs (i.e. had they operated their payroll on a best estimate basis?).
The decision maker in this regard essentially argued that they had been advised by, and relied on, advice from a 'Big Four' firm supported by a large law firm and hence had satisfied this requirement.
However, the FTT found that the Company had not reviewed the opinion given (not to them) with sufficient scrutiny given it contained facts they knew to be incorrect. The FTT also noted that CooperVision should have sought its own advice from payroll specialists. On this basis, the directors of CooperVision could not be said to have operated PAYE on a best estimate basis.
Important take aways from the case?
As tax advisers who predominantly advise on transactions, the case is an interesting one.
A key takeaway for clients should be that they always need their own advice. When we tell clients that other parties can't rely on our advice, it isn't only about reliance if something goes wrong. It is also about ensuring that clients can show they have been properly advised should they be challenged by HMRC. This case highlights the importance of this. Had CooperVision been properly advised that they did not need to operate PAYE, the answer would likely have been different (though admittedly, they may have struggled to get that advice).
The case also highlights the importance of clients giving their advisers all material facts, and the benefit of seeking an independent view on difficult and/or contentious matters. The feedback on the professional advice provided and the client requests for more robust opinions make for uncomfortable reading. Professional advisers are often guilty of littering their advice with the magic "should" but this case demonstrates that aggressively seeking a more positive view from a professional adviser might ultimately be counterproductive.
And finally, the case underlines the fact that, on a whole company sale, unless the parties each negotiate independently with the purchaser – which would be very unusual – the proceeds should be shared pro-rata in accordance with the economic rights of the shares (or classes of shares) per the articles of association. It is important to stress to clients that when considering the application of 3D (sale for more than market value), the "why" isn't relevant. It is clear here that the Majority Shareholders did act entirely in their own best interests, and that as majority shareholders, they had the power to force the Minority Shareholders to accept their terms. But irrespective of why they received more, to the extent they did so in relation to ERS, 3D applied and hence PAYE income tax and NICs were payable on the deemed excess.
This point is not esoteric. Shareholders do agree to sell for different prices; the commercial motivations of shareholders are often not aligned. But this case makes clear that HMRC will not accept even the most persuasive and well-reasoned arguments.
In communicating with clients, this point can sometimes be difficult to get across. Consider the case of two hypothetical founders (the "Founders"). In 2015, they incorporated a company together, each acquiring one share and being appointed as statutory directors. By 2026, they fall out and want to sell the business. They go to market and the best offer they receive is £100m. Founder A says they won't sell for less than £60m; Founder B just wants to sell and will accept anything more than £30m. They agree to sell for £100m, splitting the proceeds 60/40.
The first piece of bad news to deliver to the Founders is that their shares are ERS. This will undoubtedly be a shock to them, as their assumption as founders of a business will quite naturally be that these shares were not acquired by reason of any employment. However, as an adviser you would have to explain that the shares are deemed to be employment related even though the employer from which they are deemed to have acquired their shares didn't exist before they acquired their shares.
On subsequently explaining 3D and the purpose of the ERS legislation, namely, to ensure that all employment income delivered via shares or securities is chargeable to employment tax, they will likely suggest that the agreed split is not remunerative; it is simply a commercial agreement. However, you will further disappoint them by explaining that the legislation doesn't care if it's commercial or not.
So, the case doesn't make happy reading for anyone; clients or advisers. It does, though, highlight the importance of getting the right advice, at the right time, from advisers with the required level of expertise.