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HMRC internal manual

Employee Tax Advantaged Share Scheme User Manual

Schedule 4 Company Share Option Plan (CSOP): Supplementary and defined terms: Tax case - Burton Group

The case of CIR v Burton Group plc (63 TC 191) concerned the Board of Inland Revenue’s refusal to approve an amendment to an existing approved executive share option scheme, relating to the setting and varying of additional (performance) conditions to which options would be subject. The main point at issue was whether the key terms of options granted under the rules of the scheme (as amended), would be sufficiently clearly stated at the date of grant, so that the participant could be said to have obtained a ‘right to acquire shares’ at that time.

Burton Group’s approved executive share option scheme already included provision for the exercise of options to be subject to meeting performance conditions set at the date of grant. But the amendment to the scheme, which the Board refused to approve, provided scope for:

  • the right to exercise the options, and
  • the extent to which (i.e. the number of shares over which) the options could be exercised,
  • to be subject to meeting additional (performance) conditions which could be:


  • set after the option had been granted, and
  • amended after they had been set.

The principle that tax advantaged schemes can make the exercise of options conditional on meeting performance targets was not in dispute. The Revenue’s practical concern was to ensure that ‘rights’ could not be taken away from the employee other than:

  • in circumstances which were clearly defined when the option was granted and within the control of the employee concerned, and
  • to an extent which was objective, quantifiable and reasonable.

The Revenue’s main contention in the High Court was that:

  • an option, if it is to be a valid option conferring rights on the employee, must either:


  • specify the shares which the option-holder has a right to acquire, or
  • set out a machinery by means of which they can be ascertained at the time the option is exercised,


  • that requirement would not be satisfied if the performance conditions are not specified when the option is granted.

Vinelott J. decided that the Burton Group’s amendments did set out a machinery by which the shares which the option-holder had a right to acquire could be determined at any given time, because:

  • additional conditions could only be imposed by the directors in circumstances which were clearly stated (at the date of grant of the option, or before the beginning of the financial year to which the performance target related, or at the time when the option-holder first held the relevant job),
  • additional conditions which could be set were limited to specified matters, and to ‘being reasonably considered… to be a fair measure of the performance of the holder of the relevant job’.
  • the subsequent variation of such conditions was only permitted if the directors considered that different conditions in relation to the job:


  • would be a fairer measure of the performance of the holder of the job, and
  • would, reasonably, be less difficult to satisfy than they would have been without the amendment.

It is apparent that the crucial point in the judge’s view was that the directors did not have unlimited discretion on when and to what extent they could set or vary performance conditions. They had to act fairly and reasonably in the specified circumstances. Fairness and reasonableness are not wholly subjective criteria and were clearly considered to constitute objective standards or limitations to which the directors had to adhere. The operation of these objective criteria was, in effect, the machinery by which the option holder’s rights were quantifiable.