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TMI Blog1960 (6) TMI 24X X X X Extracts X X X X X X X X Extracts X X X X ..... was resolved that 250,000 of 290,319 unclassified shares of £ 1 each in the capital of the company be classified as ordinary shares, and that the directors be authorised to grant options over such shares, or any of them, to executives of the company or its subsidiaries at such times, and generally on such terms and subject to such conditions, as the directors should think proper. Pursuant to this resolution the directors of the company at a board meeting held on October 6, 1954, resolved that options upon the terms contained in a draft letter then produced to subscribe for ordinary shares in the company at 68s. 6d. per share (being the middle price ruling on the Bristol Stock Exchange on that day) be granted to the executives. The appellant, accordingly, as secretary of the company, sent to each of the executives, including himself, a letter, of which the salient conditions were that he was granted at the price of £ 1 for every 100 shares an option to purchase a specified number of shares at the price of 68s. 6d. per share, such option to be exercisable at any time within 10 years from the date of the grant of the option. The option was expressed to be nontransferable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar of assessment..........." Summarily the question is: Was the difference between (a) the market price on March 28, 1956, £ 1,025, and (b) the option price, £ 856 5s., plus a proportionate part of the cost of option, £ 2 10s., a "perquisite or profit therefrom," that is, from the office of secretary held by him, for the year of assessment? The curious feature of this case is that the Crown appears to reach the conclusion that, the sum of £ 166 was assessable for the year 1955-56 by first denying that the grant of the option was itself a perquisite or profit of the year 1954-55, and this is, I think, the aspect of the case that must first be examined. For it would not, as I understand the argument of counsel for the Crown, be contended that, if the grant of the option was itself a perquisite or profit arising from the office, the subsequent exercise of it would be another perquisite or profit. My Lords, I cannot entertain any doubt that, when the company granted the option to the appellant, he acquired something of potential value. I do not think that it matters whether it falls into the category of proprietary or contractual right, or into ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at he should not at once, if he wished, reap the benefit of a rise in price. But, guess right or wrong, there is nothing to prevent him doing so: that is his legal right, and, if he could so deal with the shares when acquired, nothing could prevent him so using his option by arrangement with a third party as to secure for himself a similar advantage. Two other adjectives are used by the Lord justice, "unrealised" and "unvalued." But the fact that there was no realisation in the sense of actual turning into money is irrelevant. The test is whether it is something which is by its nature capable of being turned into money. Nor is it relevant that it is "unvalued." I have little doubt that, if the Revenue authorities had addressed their minds to the proper question, they could have ascertained whether it had any and what value. But a in I must say that it is really irrelevant whether a value could be scribed to it or not. If it had no ascertainable value then it was a perquisite of no value--a conclusion difficult to reach since £ 20 was paid for it. In my opinion, the Crown cannot succeed in this essential aspect of the case unless it is established ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndered or, it may be, an incentive to future services. Unlike the realised value it owes nothing to the adventitious prosperity of the company in later years. On this ground also I should reject the claim of the Crown. My Lords, as I have said, the Court of Appeal were constrained to decide this case in favour of the Crown in deference to the decision of the Court of Session in Forbes [1958]S.C. 177. I agree that the two cases are not in any material respect distinguishable and think that they took the proper course in following it. The single fact upon which Roxburgh J. [1959] 1 W.L.R. 667, 682 appeared to rely, that in that case, unlike this, the grant of the option was gratuitous, cannot in my opinion affect the issue. The reasoning by which the learned judges in Forbes [1958]S.C. 177 supported the conclusion to which they came is that which formed the basis of the argument for the Crown on this appeal and I have already dealt with it. It treats the option as a thing of no value until it has been exercised and places an importance, in my opinion unjustified, on the non-transferability of the option. But, as I have pointed out, though that feature may reduce the value of the opt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... when acquired was a subsidiary issue which in the event did not arise. If, as I think they probably were, the relevant facts of that case were indistinguishable from those of the present case, I must with respect decline to follow that decision. Upon a consideration of the whole case I am of opinion that this appeal should be allowed with costs here and below. LORD REID. My Lords, in 1954 the company of which the appellant is secretary offered to its executives options to buy a number of unissued shares at 68s. 6d., which was then the market price. The options were not transferable and were to endure for 10 years if the purchaser remained so long in the company's service. The price of the option was £ 1 per 100 shares and in October, 1954, the appellant acquired an option on 2,000 shares for which he paid £ 20 The market price rose and in March, 1956, when the price was 82s. the appellant exercised his option to the extent of 250 shares and acquired them at 68s. 6d. If he had immediately sold those shares he would have made a profit of £166 and he has been assessed in this sum under Schedule E in the year 1955-56. Rule I of Schedule E is as follows: &quo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ending on the market price at the date when he had acquired it--for it is not suggested that further appreciation after shares have been allotted can be taxed. Moreover, let me suppose that the option had been exactly the same except that it was to last for 10 years whether the appellant remained in the service of the company or not. It could hardly be that that change so completely altered the nature of the option as to change the basis of taxation and make the granting of the option and not the issue-of the shares the perquisite. If, then, it was exercised years after the servant had retired what would the position be: would the issue of shares then be the perquisite and for what year of assessment would it be a perquisite? There would be no assessment under Schedule E for the year in which the shares were issued because the servant had retired. I realise that one ought not to be surprised at anything that happens under the Income Tax Act but nevertheless all this does seem a little strange. Both parties rely on Tennant v. Smith [1892] A.C. 150, 159 and in particular on the familiar passage in the speech of Lord Watson: "Is it, then, a perquisite or a profit of his office ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e pecuniary account, and surely it could not be said that an option to buy at 58s. 6d. is itself a perquisite but an option to buy at 68s. 6d. is not. And that was not argued. The argument for the Crown was not based on any special difficulty in turning the particular option to pecuniary account. It was based on the nature of the right: it was said that a right of option does not have the necessary qualities to make it a perquisite. I must confess that I do not understand that. If in fact this type of option is a kind of right which can be turned to pecuniary account, what more is necessary to make it a perquisite? I have not been able to find any clear answer to that question in the authorities cited or from the argument in this case. It appears to me that if a right can be turned to pecuniary account that in itself is enough to make it a perquisite. Then it was said that, if the appellant had attempted in any way to raise money on his option before he exercised it, he could have been acting contrary to the tenor of his agreement with his employers. It was not argued that he would have been acting in breach of his contract with them--plainly he would not--nor was it said that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by his company an option in 1938 which was repeated in a further agreement in 1944. This option was in all essentials similar to the option in the present case. The only distinction I need note is that the option in the 1944 agreement was to purchase a large number of shares at par, though the market price was then above par; and it was argued that the option gave Mr. Forbes an immediately enforceable right to the shares and that right could have been converted immediately into cash. Mr. Forbes exercised his option in 1946 and he was assessed under Schedule E as in this case on the difference between the value of the shares when they were allotted to him and the price which he paid for them. This assessment was upheld by the First Division. The Lord President's (Lord Clyde) grounds of judgment appear from two passages which I shall quote from his opinion: "In my opinion, the right which Mr. Forbes obtained on signing the agreement in 1944 was a right merely to apply for the shares; it gave him no right in or to any shares, for this could only emerge when he exercised his right and when he delivered to the company the par value of the shares he demanded. "Moreov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have been unable to see the force of his objections. If you get a share it is capable of being turned to pecuniary account because you can immediately sell it. There is generally no difficulty about that and if there is any difficulty there are other ways of raising money on it though you have to remain on the register. Similarly, if you get an option to buy shares below the market price it seems to me that the option is capable of being turned to pecuniary account by exercising it, acquiring the shares, and immediately selling them. It is true that that involves an extra step, but why should that matter? I can see no difficulty, unless it be in financing the transaction. But if the whole operation will Yield a substantial profit I would not assume that that would be difficult. The second fallacy appears to be a variant on the first. If the condition is one with which the taxpayer can easily and immediately comply, it does not, in my opinion, form an obstacle to turning the option to pecuniary account. If the condition is one which cannot immediately be complied with that may make a difference. In Bridges (Inspector of Taxes) v. Hewitt [1957] 1 W.L.R. 59, 674; 33 I.T.R. 653, 885, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prevents it from being something which could be 'turned to pecuniary account'." I think that I have already dealt with the reasons which he gives but I can sum up my view by saying that conditions and restrictions attached to or inherent in an option may affect its value, but are only relevant on the question whether the option is a perquisite if they would in law or in practice effectively prevent the holder of the option from doing anything when he gets it which would turn it to pecuniary account. I am therefore of opinion that Forbes's Trustees 1958 S.C. 177 was wrongly decided and should be overruled, and that this appeal should be allowed. LORD RADCLIFFE. My Lords, on March 28, 1956, the appellant applied for and received from E.S. & A. Robinson Ltd. 250 of its ordinary shares. He paid the company £ 856 5s. for them, a subscription at the rate of 68s. 6d. per share, although the current market price has then 82S. per share. He was enabled to obtain this advantage because in October, 1954, he and other officials and employees of the company had been offered by it options to take up stated amounts of ordinary shares at the market price then ruling, 68s. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice of the bank is no very like the benefit of an option to take up freely transferable shares at a fixed price. The basis of the Revenue's claim in Tennant v. Smith [1892] A.C. 150 was really to tax the ban manager on expenditure which he was saved, not on any money that he got or could get, while tax on the full annual value of the premises was taken from the bank itself. It was not, however, the view of the House that profits or perquisites, to be taxable could consist only of money paid. It was accepted that they could include objects or things of value received, payments in kind, so long as they were "capable of being turned into money" (Lord Halsbury L.C. [1821] A.C. 150, 156, "money--or that which can be turned to pecuniary account "(Lord Watson Ibid. 159, "money payment or payments convertible into money" (Lord Macnaghten Ibid. 163, "That which could be converted into money" (Lord Hannen Ibid. 165). I think that it has been generally assumed that this decision does impose a limitation upon the taxability of benefits in kind which are of a personal nature, in that it is not enough to say that they have a value to which there can b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of this kind as an incident of service is a profit or perquisite which is taxable as such in the year of receipt so long as the right itself can fairly be given a monetary value, and it is no more relevant for this purpose whether the option is exercised or not in that year, than it would be if the advantage received were in the form of some tangible form of commercial property. The claim to tax the advantage obtained in the year 1955-56 is not claimed by the Revenue if the right view is that the option Itself was taxable in 1954-55. Even if there were no taxable subject in the earlier years I should regard the 1955-56 claim as failing on its own terms. The advantage which arose by the exercise of the option, say £ 166, was not a perquisite or profit from the office during the year of assessment: it was an advantage which accrued to the appellant as the holder of a legal right which he had obtained in an earlier year, and which he exercised as option holder against the company. The quantum of the benefit, which is the alleged taxable receipt, is not in such circumstances the profit of his service: it, is the profit of his exploitation of a valuable right. Of course, in thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hares of £ 1 each in the capital of the company. For this the appellant paid the sum of £ 20, a somewhat illusory price of rather less than 2½ d. per share on the number of shares over which the option extended. The option was subject to certain terms and conditions. Among others, it was not transferable and, so long as the appellant was in the company's service, it would last for 10 years. As Lord Carmont pointed out in Forbes's Trustees v. Inland Revenue Commissioners 1958 S.C. 177, 185, in my opinion correctly, such an option is no more than a standing personal offer. An offer open for 10 years is certainly something usual, but in Scots law, if expressed in writing, it could not be challenged and would not be revocable. In English law it may be that some element of consideration is required to prevent such an offer being Withdrawn, and this may be the reason for the offer in the present case taking the form of an option for which a nominal payment was made. In my opinion no element of consideration should make any difference, in applying a taxing statute common to the two countries, to the determination, of the nature and effect of the right granted. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in my opinion, assuming it could be regarded as a profit of the employment, would be in no way different in principle from that of Salmon v. Weight 51 T.L.R. 333. Though that case was presented as a case of a privilege given to the servant of applying for shares, it is clear from Lord Atkin's speech in this House, concurred in by all their other Lordships, that it was only upon the application being granted by the issue of shares that a profit was regarded as having been received by the servant. Nor is it material, in my opinion. that the offer of shares is at a price which, if accepted, will show an immediate profit, as where the market value of the shares is higher than the offer price. Until accepted, or otherwise dealt with in accordance with the terms of the offer, the offer cannot, for the reason I have given, be regarded as securing for the servant a profit from his employment. It follows, also, that the same option offered to a number of employees at the same time may have different results in the case of individual employees, if it is, as here, a continuing option, according to the respective dates when it is accepted. That follows from the nature and terms of the off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 's Executors case 1958 S.C. 177, is that that merely set up the machinery for creating a benefit--that was its intention--which benefit ultimately accrued." I would only add that a transferable option, if transferred, might produce corresponding results, for the reasons which I have endeavoured to explain, though it is unnecessary so to decide for the purposes of this appeal. I would dismiss the appeal. LORD DENNING. My Lords, when I asked Mr. Heyworth Talbot in the course of the argument whether there was any special virtue in the sum of £ 20 which Mr. Abbott paid for: this option, he said there was no particular merit in it. If the sum had been one shilling or one penny, the result would be the same. It was a nominal sum, he said, which was paid so as to provide consideration for the contract and make it legally enforceable. But it soon appeared that it was essential to his argument that there should be some consideration given for the option, even if it was only, what Sir George Jessel Couldery v. Bartrum [1881] 19 Ch.D. 394, 399 once suggested, a tomtit or a canary. For Mr. Heyworth Talbot acknowledged that if no consideration had been given, then, unless the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he profits themselves. Just as it is not the expectation to salary nor the right to salary which is taxable, but only the salary itself. A bird in the bush is not taxable, even if you have the right to get it in the future, if it is still there. You must have it in hand before you can be taxed for it. And when you come to consider what "profits" the servant receives form his employment by virtue of the option, surely it makes no difference whether he pays a nominal sum or not. In either case the employer grants him the option as a reward or return for his services: and the profits he makes out of it are the same save for this: if he paid nothing, it is all profit; if he paid a peppercorn, it is all profit less the value of a pepper berry; if he paid 1s., less a 1s.; if he paid £ 20, less £ 20. There is, moreover, a very compelling reason why no distinction should be drawn according to whether a nominal sum is paid or not: for it would mean that "profits" in the Income Tax Acts would have a different meaning in Scotland from what it has in England. In Scotland, as your Lordships well know, it is unnecessary to have consideration to support a promise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts in Salmon v. Weight 51 T.L.R. 333, 334, so my illustration of a service agreement corresponds very closely in substance to the facts in Forbes's Trustees v. Inland Revenue Commissioners 1958 S.C. 177: and it leads me to the conclusion that that case was correctly decided. And it is indistinguishable from the present case, as everyone agrees. But Mr. Heyworth Talbot took a further point. He likened the grant of this option to the gift of a physical thing, such as a diamond, or a chose in action, such as an issue of shares, to a servant as a reward for his services. The value of it has to be assessed, he said, for tax purposes at the time of the grant, and it is immaterial that its value should rise or fall afterwards. But I would point out those are all interests in property, and they are very different from purely personal rights such as this option. Take the issue of shares on which Mr. Heyworth Talbot so much relied. It is clearly an interest in property. Parke B. said that "the shareholder acquires, on being registered, a vested interest of a permanent character, in all the profits...of the company, and, when registered, may be deemed a purchaser in possession of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... But even if the option could be turned to pecuniary account in such a devious way, I do not think it should be regarded as taxable. It was, as I have said, only a right to make profits in the future, if the opportunity arose. It was not itself a perquisite or profit. My Lords, in all the cases hitherto when a servant has been granted by his employer a purely personal right to receive in the future a benefit during his service, the judges have with one accord held that he receives the "perquisite" or "profit" when the thing is actuary transferred to him and not before. So said Danckwerts J. in Bridges (Inspector of Taxes) v. Hewitt[1957] 1 W.L.R. 59, 68, 69; [1958] 33 I.T.R. 653 (Ch.D.), and both Jenkins and Sellers L.JJ. agreed with him on this point [1957] 1 W.L.R. 674, 689, 703. So said all the judges in Forbes's Trustees v. Inland Revenue Commissioners 1958 S.C. 177. And I must say that I agree with them. It is the same point as I have insisted on throughout. Tax is not payable on the right in the future to receive " salaries, fees, wages, perquisites or profits," but only on those things when received. I would therefore dismiss this appeal. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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