The Gazette 1980

JANUARY-FEBRUARY 1980

GAZETTE

Income Tax and Employee Participation Schemes WILLIAM O'DEA

his employment. The Court of Appeal affirmed that decision. 6 The House of Lords 7 overruled it however. The House of Lords allowed the taxpayers' appeal for a somewhat unusual reason. They said that while a different tribunal might well have reached a different conclusion it was, nevertheless, sufficient evidence to enable the Commissioners to come to the conclusion to which they came, i.e. that the offer of shares at a favourable price was an inducement to Tyrer to become and to continue to be a loyal employee of the company, and was, consequentiy, an emolument "from" his employment. The Commissioners' decision, they said, was not one at which no reasonable Commissioners who knew the relevant law could have arrived. Consequentiy, there were no grants for reversing that decision. 8 I feel that this sort of conclusion involves a certain amount of buck-passing particularly in a case such as this. The conclusion reached by the House of Lords may be a reasonable conclusion for the Court hearing the case immediately after the Commissioners (i.e. the High Court). However, when the conclusion of the Special Commissioners was reversed (as in this case) by both the House of Lords and the Court of Appeal it is, I feel, incumbent on the House of Lords to elaborate fully on the grounds for the "reasonableness" of the Commissioners' decision, and, by implication, the "unreasonableness" of the decisions of both the High Court and the Court of Appeal. I would argue that the House of Lords failed to do this. Lord Diplock 9 delivered the principal judgment. He referred to Laidler v Perry. 10 He relied specifically on the remarks of Lord Donovan 11 in that case to the effect that " . . . the company disbursed these sums to help to maintain a feeling of happiness among the staff and to foster a spirit of personal relationship between manage- ment and staff. In less roundabout language that simply means in order to maintain the quality of service given by the staff. Looked at this way, the payments were an inducement to each recipient to go on working well." That remark, he said, was "very much in point" in the present case. I personally find this somewhat surprising. The facts are different in a very fundamental respect. The Christmas vouchers in Laidler v Perry were definite tangible benefits. What was given in the present case was a mere intangible opportunity to take a real commercial risk — a risk which might or might not result in a benefit. This was the very issue on which the High Court and the Court of Appeal in the U.K. parted company with the Special Commissioners in this case and there is no attempt in Lord Diplock's judgment to deal with the arguments used by those Courts on this point. Anyway, I feel that the authority of Laidler v Perry is now doubtful, because of subsequent developments (see e.g. Pritchard v Arondale [1971] 3 AER 1011). It is worth noting that

The extent to which Schedule E of the income tax code applies to employee incentive schemes is uncertain. The problem of whether benefits received by an employee under such a scheme are taxable as emoluments "from" his employment under Schedule E has given rise to much difficulty in practice. 1 It arose again recently in the case of Tyrer v Smart. 2 In that case the House of Lords overruled the decisions of both the English High Court and the Court of Appeal. The facts are simple. In 1969 a company decided to go public. It offered 5.6 million shares for sale to the public. The sale was to be at "the striking price", i.e. the highest price at which sufficient applications for all shares offered were received. 10% of die shares were reserved for employees of the company at £1 per share. The employee had to be with the company for at least five years. An employee could apply for as many shares as he wished. Tyrer was an employee of the company. On March 9th he applied for 5,000 shares in the company and enclosed a cheque for £5,000. The offer closed on March 12th. On March 13th a striking price of 25/- per share was announced. Tyrer's application was accepted on March 17th. Dealings on the stock exchange started on March 18th. At close of business on'that day the shares had risen to 27/6. Tyrer was assessed to tax under Schedule E. He was assessed on the advantage that had "accrued" to him "from" his employment under Schedule E. Accordingly he appealed. The Special Commissioners upheld the assessment however. The Commissioners found a number erf facts: (a) When Tyrer made his application he had no particular confidence that the shares would increase in price; (b) The value of the shares when Tyrer's legal right to them arose on March 17th was 22/-; (c) The purpose of the offer of shares to the employees at the preferential price was to encourage them to identify with the company and to induce them to be loyal employees of the company to, as it were, give them an interest, understanding, and sense of involvement in the company. They concluded therefore that Tyrer was assessable on the difference between the value of the shares on March 17th (when Tyrer's legal rights to them arose) and the price he paid for them (i.e. 20/-). 3 Tyrer appealed to the High Court Brightman, J., 4 disagreed with die result of the Commissioner's determ- inations. He felt that although the employment was the causa sine qua non rather than the causa causans of the benefit nevertheless the employee was not assessable to tax. 3 He reasoned that although Tyrer would not have had the opportunity to purchase the shares had he not been employed by this company, nevertheless the benefit which accrued to him resulted from his decision as a private individual to purchase the shares in question and take die commercial risk involved. The benefit, said the Court, did not arise direcdy as a result of his exercise of

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