The Gazette 1980

GAZETTE

JANUARY-FEBRUARY 1980

Income Tax and

Employee Participation Schemes

WILLIAM O'DEA

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.

It arose again recently in the case of

Tyrer v Smart.

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

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/-).

Tyrer appealed to the High Court Brightman, J.,

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.

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

his employment. The Court of Appeal affirmed that

decision.

The House of Lords

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.

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

Lords failed to

do this.

Lord Diplock

delivered the principal judgment. He

referred to

Laidler v Perry.

He relied specifically on the

remarks of Lord Donovan

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

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