A special commissioner decided that the Revenue had properly charged the taxpayer to tax under Sch. E on a sum received on the sale of shares in a company, issued to him in satisfaction of rights under his employment agreement with a partnership when its business and assets were transferred to the company.

Facts

The taxpayer appealed against the amendment to his self-assessment return for the year ended 5 April 1999. The amount charged to tax under Sch. E as a result of the amendment was £546,148.

The taxpayer had been employed by a partnership in accordance with the terms of a 1992 agreement which provided that should the partnership be dissolved or sold during the term of employment he would receive 2.5 per cent of the proceeds after costs. The taxpayer remained an employee of the partnership until May 1998 when the business and other assets of the partnership were transferred to a company (‘PCL’), at which point the partnership was dissolved or sold. The taxpayer did not immediately receive anything in satisfaction of his right to receive 2.5 percent of the proceeds but it appeared that the ex-partners recognised the taxpayer's entitlement under the 1992 agreement and gave him the chance to purchase shares in PCL.

The taxpayer was allotted 1,118,233 B shares of 1p each for a total subscription price of £11,182.33 in 1999 and the next day PCL was sold. The consideration attributed to the taxpayer's holding of B shares was £557,330. The Revenue said that £546,148 (i.e. £557,330 less £11,182) was an emolument from his employment.

The taxpayer argued that the issue of the B shares was not derived from his ‘being an employee’ of PCL but as a result of his interest in the partnership and the right to receive 2.5 per cent of the proceeds. Those rights had been obtained by the taxpayer in 1992. They should properly be regarded as an inducement for him to agree to become an employee of the partnership; as such they were taxable under Sch. E in 1992. The B shares could not have been derived ‘from’ his employment with PCL; they were derived instead from his own property in the 2.5 per cent of the proceeds.

Issue

Whether the shares were taxable as an emolument of the taxpayer's employment.

Decision

The special commissioner (Stephen Oliver QC) (dismissing the appeal) said that although the taxpayer's entitlement to 2.5 per cent of the proceeds had its origin in the words of the 1992 agreement, unless and until the partnership was dissolved or sold the taxpayer had no immediate right to 2.5 per cent of the proceeds. Two conditions had to be satisfied before that right matured and achieved a value. First, the time had come when the partnership was dissolved or sold. Secondly, the taxpayer still had to be employed on the terms of the 1992 agreement. An emolument was something that both arose from the employment in question and, as Lord Simonds observed in Abbott v Philbin ((1960) 39 TC 82, at p. 118) was capable of being turned into money. In 1992 the taxpayer's ‘right’ to the 2.5 per cent of the proceeds was a mere expectation. It was as much an expectation as the taxpayer's right to salary. In both situations he had to work for his employer and carry out the terms of his employment contract before the right could mature into money or something capable of being turned into money. It followed that the right to 2.5 per cent of the proceeds was not an emolument arising in the year 1992. From that it followed that that right, which could only mature if the taxpayer continued to work for the partnership, did not cease to be within the scope of Sch. E after the 1992 agreement came into being.

The present case was not the same as Shilton v Wilmshurst (HMIT) [1991] BTC 66 where a lump sum was paid to a professional footballer by his former club to induce transfer to another club. The payment was held by the House of Lords to have been an emolument notwithstanding that it was an inducement paid by his ex-employer. Here however the taxpayer received neither payment nor money's worth as an inducement, in 1992, for taking up his employment with the partnership. The right to the 2.5 per cent of the proceeds was therefore not an emolument taxable in 1992.

To the extent that the amount assessed under Sch. E was an emolument of the taxpayer, it was an emolument from his employment with the partnership. It matured or ‘vested’ in May 1998 when the partnership was dissolved or sold following the transfer of the business and assets to PCL. From that moment on the taxpayer was entitled to 2.5 per cent of the proceeds.

From the evidence, it followed that the taxpayer's entitlement to 2.5 per cent of the proceeds became something capable of being turned into money in May 1998. His entitlement was an emolument of an amount to be determined by the date in 1999 on which the taxpayer subscribed £11,182 for the B shares that were going to be sold the next day for £557,330. The net overall benefit that the taxpayer obtained, i.e. £546,148, was the consideration that the ex-partners in the partnership ascribed to his right to ‘2.5 per cent of the proceeds’. That amount arose from the taxpayer's rights as an employee of the partnership and it was the only consideration derived from those rights. The Revenue were therefore correct in charging the taxpayer to tax under Sch. E on £546,148 for the year 1998–99.

(2006) Sp C 542. Decision released 25 May 2006.