“We do not read that decision as meaning that any deferred payment rights granted or held by employees should be treated as separate from any subsequent payment such that they are taxable on grant or award.”
“You will note that the option is not transferable and to the extent not previously exercised will expire on your death or retirement, upon your Service with the Company and/or its subsidiaries ending, or on the tenth anniversary of the date of grant of the Option, whichever first occurs.”
“If it had no ascertainable value then it was a perquisite of no value.” (5) He pointed to the difficulty of contending that an option given to an employee to acquire shares at a price lower than the prevailing market price was “not a perquisite which falls within the Schedule.” (6) As there could not be one perquisite at the date of the grant and a second perquisite when the shares were taken up, the Crown's case failed. (7) Independently of that, the taxable perquisite must be something arising "therefrom," i.e. (from the office, in the year of assessment) and he “did not find it easy to see that the increased difference between the option price and the market price in 1956 or, it might be, in 1964 in any sense arises from the office”, as this difference would be “due to numerous factors which have no relation to the office of the employee, or to his employment in it”
“Two points were made by the majority of the House of Lords in Abbott v Philbin[1961] AC 352 , both of which were subsequently reversed by statute. The first point, and the ratio decidendi of the case, is the one referred to by Lord Walker JSC in Gray’s Timber and by Lord Reed JSC in UBS concerning the time at which the option became taxable … The second point, which was obiter, was that the difference between the price of the shares under the option and their market value when the option was exercised did not arise “from” the taxpayer's employment.”
“The principle of taxing an employee as soon as he received a right or opportunity which might or might not prove valuable to him, depending on future events, was an uncertain exercise which might turn out to be unfair either to the individual employee or to the public purse. At first the uncertainty was eased by extra-statutory concessions. But Parliament soon recognised that in many cases the only satisfactory solution was to wait and see, and to charge tax on some “chargeable event” (an expression which recurs throughout Part 7) either instead of, or in addition to, a charge on the employee's original acquisition of rights.”
“That case was about share options, which are now dealt with separately in Chapter 5, but it illustrates the general approach that applied in the days when the taxation of employee benefits was very much similar than it is now.”
“No one can doubt but that there are circumstances in which employees may be awarded shares as an incentive or reward and that those employees may subsequently receive dividends or distributions in respect of their shareholding, the source of which may properly be identified as the shares and not their employment. The employees, in such a case, receive those payments in their capacity as shareholder or investor and not as employee. When employees were granted options to acquire shares in their employer and exercised those options, they profited by the increased difference between the option price and the market price when they exercised their options. The profit accrued to the employees as holders of their options and not as employees; it was derived from the option and not from employment (Abbott v Philbin). But it is not in every case that an employee who is awarded shares and receives dividends can escape the conclusion that the dividends are remuneration and not investment income … How then is the distinction to be made between the receipt of payments in the form of dividends as employee and the receipt of dividends as shareholder? What determines the character of the income in the hands of the recipient? What determines the capacity in which the recipient receives such income? The answer lies not in the administration of some post- Ramsay prophylactic against tax avoidance but in the methods which the courts have long been accustomed to deploy whenever it is necessary to decide whether income is from employment and should thus be charged under Schedule E. The conventional approach of the courts is to look at all the circumstances of the case in order to answer the one statutory question, namely whether the income receipts of the employee are emoluments or profits from employment.”
“It is that approach which enables a distinction to be drawn between Abbott v Philbin and White v Franklin. In Abbott v Philbin, a realistic appraisal of the facts led to the conclusion that the benefit which arose as a result of the exercise of the option accrued through what Lord Radcliffe (at 369) described as the “judicious exercise” of the holder's option rights. It accrued to him in his capacity as option holder exercising his discretion as to the best time to exercise his rights having regard to the increase in value of the shares, an increase due to what Viscount Simonds described as “the adventitious prosperity of the company in later years” (367) (that it was exercised less than two years after acquisition of the option was neither here nor there). The facts of this case are miles away from the circumstances in Abbott v Philbin. The payments received by the employees owed nothing to fluctuations or increases in the value of shares in Ellastone and everything to the amount which PA had decided to award as bonuses to its employees. Whilst it is true that the Mourant trustees exercised a discretion in the sense of independently questioning who should be recipients, the quantum of that which the employees received was entirely dictated by the amount PA decided to award as bonuses. The receipts were triggered by PA's decision to continue its policy of making bonus payments and to fund the 1999 Trust and arrived in the hands of employees, as they were intended to do, as bonuses.”
“Under ordinary principles of tax law, where an employee receives shares as part of his remuneration, he is liable to income tax on the value of the shares, less any consideration which he may have given for them … The position where an employee is granted a conditional share option was considered by the House of Lords in Abbott v Philbin[1961] AC 352 . That was a case where a company's senior employees had been given an option to subscribe for its shares at the then current market price, the option being exercisable at any time within the next ten years. The employees were thus incentivised to increase the company's prosperity. The option was non-transferable and would expire on the employee's death or retirement. It was held that income tax was chargeable on the realisable monetary value of the option at the date of its acquisition, rather than on the value realised when it was subsequently exercised, as the revenue had argued.” (2) At [94], Lord Reed stated: “If the shares were not restricted securities, their recipients therefore fall to be taxed in respect of their receipt of the shares in accordance with ordinary taxation principles. That is broadly as the revenue contended in the narrower version of their argument, subject to one qualification. The revenue argued that the shares should be valued for income tax purposes without regard to the restrictive conditions, since those conditions were not intended to be commercially relevant. I am unable to agree. The shares were subject to conditions which, as the First-tier Tribunal found, had the effect of reducing their value on the date of acquisition by a small amount (below the 10% threshold which would bring section 446B into play). Applying ordinary taxation principles, as laid down in Abbott v Philbin[1961] AC 352 , the value of the shares has to be assessed as at the date of their acquisition, taking account of those conditions. To disregard the conditions would be to treat the employees as having received a more valuable perquisite than they actually received. It is however also necessary to take account of the call options purchased by ESIP out of the sum paid by UBS for its subscription for the shares. Since the options offset the risk to shareholders arising from the conditions, they presumably enhanced the value of the shares and are therefore relevant to the valuation of the perquisite received by the employees.”
“In Abbott v Philbin[1961] AC 352 a majority of the House of Lords held that an employee of a company was liable to income tax on the grant by his employer of an option to purchase shares in that company in the tax-year in which the option was granted because the option itself had a monetary value which the employee could realise.”
“Mr Charman pointed out that, in Abbott v Philbin, the option was immediately exercisable although it was not transferable. She submitted that the result would have been different if the option had not been immediately exercisable. I do not accept this. The reasoning of the majority was that the option could be “turned to pecuniary account” (in the words of Lord Watson in Tennant v Smith[1892] AC 150 , 159 ) as soon as it was granted. This was not because it was immediately exercisable, but because it had a financial value which could immediately be realised in one way or another: see Viscount Simonds at pp 365–366 (“there could be no difficulty in the grantee arranging with a third party that he would exercise the option and transfer the shares to him”), Lord Reid at p 371 (“I find nothing to indicate that there would have been much difficulty in finding someone who would have paid a substantial sum for an undertaking by the appellant to apply for the shares when supplied with the purchase money and called upon to exercise the option and thereupon to transfer the shares”), pp 373–376 and Lord Radcliffe at pp 378–379 (“he could also at any time, at his choice, sell or raise money on his right to call for the shares”). As all three members of the majority recognised, the fact that the option was not transferable affected the value of the option upon grant, but did not alter the fact that it had some value. This reasoning would be equally applicable to an option which was not yet exercisable, but which could immediately be turned to account in a similar way.”
“the making of the Payment, its timing and its amount were all dependant on extraneous events, outside of Mr Saunders’ control as an employee or former employee – the making of the Payment was triggered by the Sale, and the quantum was calculated by reference to the Fair Market Value of the Shares at the time the award was paid out rather than being directly attributable to the work of Mr Saunders in any earlier years. The Payment was, he submitted, a contingent and exceptional bonus, only ‘earned’ at the time of the Sale, which was in the overseas part of a split year. Had the Sale not occurred within two years of the end of his employment, no payment would have been made.”
“The taxpayer was employed from 1958 to 1979 by G. Ltd. On1 April 1979 he, together with all other employees of G. Ltd., was transferred to the employ of G. Ltd.’s parent company. Prior to, and in anticipation of, those transfers the trustees of two trusts formed for the benefit of G. Ltd.’s employees exercised powers to bring into effect provisions leading to their winding up and the distribution of their assets to the employees.”
“The trustees shall within the nine months immediately following the termination date pay or provide for all liabilities mentioned in the definition of the terminal fund and apply the terminal fund by allocating thereout in respect of each eligible employee such a sum as the trustees shall in their absolute and unfettered discretion think fit but so that A. No eligible employee shall be entitled to receive as of right any sum allocated to him…”
“the period to which any given payment is to be attributed is a question to be determined as one of fact in each case, depending upon all the circumstances, including its source and the intention of the payer so far as it can be gathered either from direct evidence or from the surrounding circumstances.”
“The mere fact that the seniority of the taxpayer as an employee was a matter taken into account in arriving at the amount of the distribution does not appear to me to be any indication that the payment determined upon and made in the year of assessment 1979–80 … can properly be treated as made for or in respect of any other period.”