Wilcock (Inspector of Taxes) v Eve

JurisdictionEngland & Wales
CourtChancery Division
Judgment Date25 Nov 1994

Chancery Division.

Carnwath J.

Wilcock (HM Inspector of Taxes)
and
Eve

Launcelot Henderson (instructed by the Solicitor of Inland Revenue) for the Crown.

David Ewart (instructed by Fenwick Willan & Holman) for the taxpayer.

The following cases were referred to in the judgment:

Abbott v Philbin (HMIT) ELR[1961] AC 352

Bray (HMIT) v Best TAXTAX(1989) 61 TC 705; [1989] BTC 102

Hamblett v Godfrey (HMIT) TAXTAXTAX(1986) 59 TC 694; [1986] BTC 143 (ChD), [1987] BTC 83 (CA)

Hochstrasser (HMIT) v Mayes ELR[1960] AC 376

Laidler v Perry (HMIT) ELR[1966] AC 16

Mairs (HMIT) v Haughey TAX[1992] BTC 373 (CA)

Shilton v Wilmshurst (HMIT) TAX[1991] BTC 66

Wicks v Firth (HMIT) TAXTAXTAX(1982) 56 TC 318; [1982] BTC 134 (CA), [1982] BTC 402 (HL)

Income tax - Income and Corporation Taxes Act 1970 schedule ESch. E - Ex gratia payment by parent company of group after taxpayer's employing company had been sold - Payment made in recognition of loss of option rights - Whether payment taxable - Income and Corporation Taxes Act 1970 section 181 subsec-or-para (1)Income and Corporation Taxes Act 1970, s. 181(1); Finance Act 1976 section 61 subsec-or-para (1)Finance Act 1976, s. 61(1)(Income and Corporation Taxes Act 1988 section 19 subsec-or-para (1) section 154 subsec-or-para (1)Income and Corporation Taxes Act 1988, ss. 19(1) and 154(1)).

This was an appeal by the Revenue against a decision of the general commissioners for Tower Hamlets that an ex gratia payment made to the taxpayer by the parent company of his employer after a management buy-out, in recognition of loss of rights under an approved option scheme operated by the group was not an emolument of the employment within the Income and Corporation Taxes Act 1970, Income and Corporation Taxes Act 1970 section 181 subsec-or-para (1)s. 181(1) nor to be treated as an emolument under the Finance Act 1976,Finance Act 1976 section 61 subsec-or-para (1)s. 61(1)as a benefit in kind.

The taxpayer was employed by a company ("LBUA") since 1972 and was appointed finance director in 1980. LBUA was a subsidiary of Hill Samuel Group ("HSG").

In 1981 the taxpayer joined the HSG savings related share option scheme arranged in conjunction with the Leicester Building Society. Under the scheme he had the right to buy ordinary shares in HSG at 90 per cent of their market value at the time of joining the scheme on completion of a five-year contract period provided that he was then still employed by the group. Three other directors and one employee of LBUA also joined the scheme.

HSG sold LBUA on 21 May 1986 to the company's senior management and employees. From that date LBUA was no longer controlled by HSG. The taxpayer therefore ceased to employed by HSG. He remained entitled to the proceeds of his save-as-you-earn contract with the Leicester Building Society but he lost the opportunity to subscribe for shares in HSG.

On 2 September 1987 the taxpayer received a cheque from HSG for £10,000. It came as a complete surprise as he had not discussed any such payment nor had he been aware of the decision by HSG to make the payment. HSG later stated to the inspector that there was no obligation on HSG to make the payment to compensate the taxpayer for the loss of rights under the option scheme but HSG wished to maintain its reputation of fair dealing with its employees and ex-employees.

The commissioners allowed the appeal on the ground that the payment was an ex gratia payment made in recognition of the loss of rights when the taxpayer ceased to be employed by HSG. They found that there was no evidence that the payment was dependent on or related to his continued employment with LBUA and concluded that there was no relevant connection between the source of the payment and the taxpayer's employment at the time when the payment was made. They determined that there was neither an emolument of that employment nor a benefit in kind provided by reason of that employment.

The Revenue appealed to the High Court on two grounds: that the commissioners erred in simply looking at the fact of the decision by HSG to make the payment without considering its underlying purpose; and that there was a link between HSG and the continuing employment.

No statutory liability under the specific charge on employees options provided by the Income and Corporation Taxes Act 1970, Income and Corporation Taxes Act 1970 section 186s. 186, was suggested.

It was common ground that a "benefit in kind" under the Finance Act 1976, Finance Act 1976 section 61s. 61 might include a cash sum.

Held, dismissing the Revenue's appeal:

1. In deciding whether the payment made in 1987 was taxable as an emolument of the taxpayer's employment under the Income and Corporation Taxes Act 1970, Income and Corporation Taxes Act 1970 section 181 subsec-or-para (1)s. 181(1), the question was whether the option was intimately connected with the employment. When the value of an option was realised on its exercise, it was not taxable underIncome and Corporation Taxes Act 1970 section 181 subsec-or-para (1)s. 181(1) because its value would be dictated by factors which bore no relation to the taxpayer's employment. The payment had the same character as the option rights, the loss of which it was intended to compensate. (Abbott v Philbin (HMIT) ELR[1961] AC 352 followed.)

2. To be taxable under the Finance Act 1976, Finance Act 1976 section 61 subsec-or-para (1)s. 61(1), a benefit in kind had to be received "by reason of" the employment. While the term "by reason of" was wider that the term "from" in the Income and Corporation Taxes Act 1970, Income and Corporation Taxes Act 1970 section 181 subsec-or-para (1)s. 181(1), on the facts of this case, the test under Finance Act 1976 section 61s. 61 was the same as that under Income and Corporation Taxes Act 1970 section 181 subsec-or-para (1)s. 181(1). The commissioners were entitled to conclude that the payment was not linked to the taxpayer's employment in the year of assessment and the payment was not taxable under Finance Act 1976 section 61 subsec-or-para (1)s. 61(1).

CASE STATED

1. At a meeting of the commissioners for the general purposes of income tax for the Division of Tower Hamlets held on 28 April 1992, D P Eve ("the taxpayer") appealed against an assessment to income tax made upon him under Income and Corporation Taxes Act 1970 schedule ESch. E for 1987-88 in the sum of £10,000.

2. Shortly stated the question for our determination was whether a lump sum of £10,000 received by the taxpayer in 1987-88 was an emolument of his employment under Income and Corporation Taxes Act 1970 schedule ESch. E by virtue of Income and Corporation Taxes Act 1970 section 181 subsec-or-para (1)s. 181(1) of theIncome and Corporation Tax Act 1970; or alternatively was a benefit in kind received by reason of his employment by virtue ofFinance Act 1976 section 61s. 61 of the Finance Act 1976.

3. The taxpayer was represented by Mrs Carol Chleboun of Coopers and Lybrand Deloitte, chartered accountants, and the inspector appeared in person. Evidence was given by the taxpayer.

4. [Paragraph 4 set out the documentary evidence produced to the commissioners.]

5. The following facts were admitted or were found by the commissioners from the evidence, both oral and documentary:

  1. (a) The taxpayer is a chartered accountant. He commenced employment as chief accountant with Lambert Brothers (Underwriting Agencies) Ltd (LBUA) on 2 October 1972.

  2. (b) He was appointed finance director on 1 January and still holds that office.

  3. (c) In October 1981 LBUA was a wholly owned subsidiary of HSG and as such all its employees were entitled, if they wished, to join the HSG savings related share option scheme. This scheme was arranged in conjunction with a save-as-you-earn contract with the Leicester Building Society.

  4. (d) The taxpayer exercised his entitlement to join the scheme in October 1981. This gave him the right to buy ordinary shares in HSG, at 90 per cent of the market value at the time of joining, on completion of a five-year contract period provided that he was then still employed by the group. Three other directors and one employee of LBUA also joined the scheme.

  5. (e) Because of the provisions of the Lloyds Act 1962 HSG sold LBUA on 21 May 1986 to that company's senior management and employees. From that date LBUA was no longer controlled by or was a member of HSG. Under the sale arrangements HSG remain entitled to 85 per cent of the net profits of LBUA until 30 September 1995.

  6. (f) As a result of the sale the taxpayer ceased to be employed within HSG on 21 May 1986 and hence was not so employed at the end of the share option contract period in October 1986. He was still entitled to the proceeds of his save-as-you-earn contract with the Leicester Building Society but he lost the opportunity to subscribe for shares in HSG.

  7. (g) At a meeting early in May 1986 with HSG lawyers to discuss arrangements for the sale of LBUA the taxpayer was told that he and other employees would not be able to exercise their share option after the sale took place. There was no other discussion about the matter at that time.

  8. (h) With a letter dated 2 September 1987 from the secretary of HSG the taxpayer received a cheque for £10,000.

  9. (i) The letter read "the directors of this company have decided to make you an ex gratia payment of £10,000 and a cheque for this amount is accordingly enclosed".

  10. (j) In evidence the taxpayer stated that the letter of 2 September 1987 was a complete surprise and he had not been aware of the decision by HSG to make the payment. He was delighted but had not expected it.

  11. (k) In reply to a letter from the inspector the previous secretary of HSG gave the reasons in a letter dated 20 April 1989, for the decision on 21 April 1987 to make the payments to the taxpayer and others and explained how they were calculated.

  12. (l) The secretary said:

I disclose that an important consideration in deciding to make the payments and that...

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