Proceeds from the disposal of shares for more than market value were treated as employment income and taxable accordingly.

The taxpayer (Grays Timber Products Limited) had appealed to the Court of Session against the decision of the Special Commissioners that there was a disposal of shares for consideration which exceeded the market value at the time of disposal. The taxpayer subsequently brought an appeal against the decision of the Court of Session to the Supreme Court.

By way of brief background to the case, Mr. G, a director of Grays Timber Products Limited, and a shareholder in Grays Group Ltd, had entered into a subscription and shareholders' agreement which provided, that in the event of a change in control of 50% or more of the ordinary share capital of the Group, Mr. G could dispose of his shares under the terms laid out in the Agreement. The broad terms were that in the event of a disposal of shares after the second anniversary of the completion date, Mr. G would become entitled to an agreed enhanced payment, in addition to the return of his original investment. The payment would be disproportionately greater than the amounts received by the other shareholder or his percentage of the equity shares of the Gray's Group Limited.

The taxpayer contended that the disposal of the shares by Mr. G was for their market value and as such represented the whole consideration to be taken into account in his capital gains tax computation. HMRC maintained that the shares had been sold for more than their market value and the enhanced payment was taxable as employment income.

The Supreme Court dismissed the taxpayers appeal on the grounds that Mr. G's special rights were personal to him and the rights were extinguished by the payment which he received. The special rights were not the subject of the transaction and did not transfer to the purchaser. The valuation did not take account of the actual sale of Mr. G's shares at a special price enhanced for reasons of Mr. G's position as director. Therefore the Supreme Court held that the enhanced payment was taxable as employment income.

The case of Grays Timber Products Limited as brought before the Court of Session featured in the November issue of tax.point.

The case as brought before the Supreme Court is available to download from http://www.bailii.org/cgi-bin/markup.cgi?doc=/uk/cases/UKSC/2010/4.html&query=Grays+and+Timber+and+Products&method=boolean