Abbott v Philbin

An enforceable option granted as an incident of employment is a taxable perquisite when granted if the right is, by its nature, capable of being turned to pecuniary account and can fairly be valued. Non-transferability does not prevent that conclusion where the holder can exercise the option, obtain freely transferable shares, and sell or raise money against them.

Restrictions and conditions may reduce the option’s value. They prevent immediate taxation only where they effectively preclude its conversion into money. Once the option itself is the perquisite, an increase in value realised on its later exercise is not a second employment perquisite. That increase arises from exploiting an existing legal right and from subsequent market conditions, rather than from the office or employment in the later year.

The appellant was the secretary of a company which granted him a ten-year, non-transferable option to subscribe for 2,000 shares at the prevailing market price. He paid £20 for the option. When the share price subsequently rose, he exercised the option over 250 shares and was assessed under Schedule E on the difference between their market value and his total acquisition cost.

The Special Commissioners upheld the assessment. Roxburgh J allowed the taxpayer’s appeal on a case stated, but the Court of Appeal restored the assessment because it followed Forbes’s Testamentary Trustees v Commissioners of Inland Revenue, 1958 S.C. 177.

The central question was whether the employment perquisite arose when the enforceable option was granted or when the option was later exercised and the shares allotted.

1. By a majority of three to two, the appeal was allowed with costs. Viscount Simonds, Lord Reid and Lord Radcliffe held that the option itself was the employment perquisite. Lord Keith of Avonholm and Lord Denning dissented.

2. Per Viscount Simonds, Lord Reid and Lord Radcliffe, an enforceable option to acquire freely transferable shares is a right capable by its nature of being turned to pecuniary account. The holder may exercise it and sell the shares, or arrange with a third party to exercise it and transfer the resulting shares. The option’s non-transferability therefore affects its value but does not deprive it of its character as a perquisite within Rule 1 of the Ninth Schedule to the Income Tax Act 1952.

3. Per Lord Reid, restrictions and conditions must be considered principally in valuing the right. They prevent the option from constituting an immediate perquisite only if, in law or practice, they effectively prevent the holder from doing anything which turns it to pecuniary account. A mere expectation, where the employer remains free to refuse an allotment, is materially different from a binding option under which the employer has no further choice.

4. Per Viscount Simonds and Lord Radcliffe, there could not be one perquisite when the option was granted and a second when it was exercised. The later increase in value did not arise from the office in the year of exercise. It arose from the holder’s exploitation of an earlier legal right and from subsequent commercial and market circumstances unrelated to his services. Lord Reid reached the same result on the nature of the option and considered the statutory reference to a perquisite “for the year of assessment” supportive of that conclusion.

5. The majority held that Forbes’s Testamentary Trustees v Commissioners of Inland Revenue, 1958 S.C. 177, was wrongly decided and overruled it. Its treatment of a non-transferable option as valueless until exercise placed unjustified weight on non-transferability and on the need to pay the subscription price.

6. Lord Keith and Lord Denning would have dismissed the appeal. They regarded the option as machinery creating a personal right to obtain a future benefit. In their view, the taxable profit arose only when the shares were allotted and the benefit was realised.

1. House of Lords: Allowed the taxpayer’s appeal by a majority of three to two, overruled Forbes’s Testamentary Trustees v Commissioners of Inland Revenue, 1958 S.C. 177, and discharged the assessment in respect of the later exercise of the option.

2. Court of Appeal: Decided for the Crown because it followed the materially indistinguishable Scottish decision in Forbes’s Testamentary Trustees.

3. High Court: Roxburgh J allowed the taxpayer’s appeal on a case stated, treating the gratuitous nature of the option in Forbes’s Testamentary Trustees as a possible distinction.

4. Special Commissioners: Upheld the assessment, considering the case indistinguishable from Forbes’s Testamentary Trustees.