Grays Timber Products Ltd v Revenue and Customs: SC 3 Feb 2010

An assessment to income tax had been raised after the employee resold shares in the company issued through the employees’ share scheme at a price which the Revenue said was above the share value. The company appealed against a finding that tax was payable.
Held: The appeal failed. The Revenue should calculate the price which might be agreed between a hypothetical purchaser and seller making proper allowance for the particular characteristics of the seller and of the shareholding. There was real doubt as to whether Parliament had, in Part 7, enacted a scheme which drew a coherent and consistent distinction between intrinsic and extrinsic rights attaching to shares and other financial instruments.
Lord Walker explained that the provisions of Part 7 reflect three different legislative purposes: ‘First there is Parliament’s recognition that it is good for the economy, and for social cohesion, for employees to own shares in the company for which they work. Various forms of incentive schemes are therefore encouraged by favourable tax treatment
Second, if arrangements of this sort are to act as effective long-term incentives, the benefits which they confer have to be made contingent, in one way or another, on satisfactory performance. This creates a problem because it runs counter to the general principle that employee benefits are taxable as emoluments only if they can be converted into money, but that if convertible they should be taxed when first acquired. That principle was stated by Lord Radcliffe in Abbott v Philbin [1961] AC 352, 379
The principle of taxing an employee as soon as he received a right or opportunity which might or might not prove valuable to him, depending on future events, was an uncertain exercise which might turn out to be unfair either to the individual employee or to the public purse. At first the uncertainty was eased by extra-statutory concessions. But Parliament soon recognised that in many cases the only satisfactory solution was to wait and see, and to charge tax on some ‘chargeable event’ (an expression which recurs throughout Part 7) either instead of, or in addition to, a charge on the employee’s original acquisition of rights.
That inevitably led to opportunities for tax avoidance. The ingenuity of lawyers and accountants made full use of the ‘wait and see’ principle embodied in these changes in order to find ways of avoiding or reducing the tax charge on a chargeable event, which might be the occasion on which an employee’s shares became freely disposable (Chapter 2) or the occasion of the exercise of conversion rights (Chapter 3). The third legislative purpose is to eliminate opportunities for unacceptable tax avoidance. Much of the complication of the provisions in Part 7 (and especially Chapters 3A, 3B, 3C and 3D) is directed to counteracting artificial tax avoidance.’
Lord Hope commented that ‘if there is any theme in the Act it is one of anti-avoidance and the closing down of perceived tax loopholes’.

Lord Hope of Craighead, Deputy President, Lord Rodger of Earlsferry, Lord Walker of Gestingthorpe, Lord Brown of Eaton-under-Heywood and Lord Kerr of Tonaghmore
[2010] UKSC 4, Times 04-Feb-2010, UKSC 2009/0044, [2010] WLR (D) 21, [2010] STI 393, [2010] 2 All ER 1, 2010 GWD 8-145, [2010] BTC 112, [2010] STC 782
Bailii, SC Summ, SC, WLRD, Bailii Summary
Income Tax (Earnings and Pensions) Act 2003 446X(b), Taxation of Chargeable Gains Act 1992
CitedGrey and Another (Hunter’s Nominees) v Inland Revenue Commissioners; Orse Gray v IRC HL 2-Nov-1959
The House considered whether certain instruments which were presented for adjudication to stamp duty under section 13 of the Stamp Act 1891, are or are not chargeable with ad valorem duty.
Held: The word ‘disposition’ is to be given its . .
At SCSGrays Timber Products Ltd v HM Revenue and Customs SCS 13-Feb-2009
The company appealed against a determination by the defendants that when an employee had sold his shares, it had done so at a price over the market value, and in doing so, incurred a charge to income tax.
Held: The appeal failed. . .
CitedLynall v Inland Revenue Commissioners HL 2-Jan-1971
The House was asked about the fixing of ‘price . . in the open market’ of a parcel of shares held in a private company. The Finance Act 1894 provided a method of valuation of property for estate duty purposes by reference to what the property would . .
CitedAbbott v Philbin (Inspector of Taxes) HL 21-Jun-1960
A company’s senior employees had been given an option to subscribe for its shares at the then current market price, the option being exercisable at any time within the next ten years. The employees were thus incentivised to increase the company’s . .
CitedAttorney-General for Ireland v Jameson CA 1905
The court was asked as to the valuation of shares. The shares were subject to restrictions on transfer.
Held: The price which the shares would fetch if sold on the open market should reflect the terms on which the purchaser would be entitled . .
CitedSalvesen’s Trustees v Inland Revenue Commissioners SCS 1930
The court considered the valuation of shares in a notional purchase. The company’s articles of association contained a provision that the company might at any time, by extraordinary resolution, resolve that any shareholder, other than a director or . .
CitedInland Revenue Commissioners v Crossman HL 1937
For a valuation for estate taxes, the value is what a purchaser in the open market would have paid to enjoy whatever rights attached to the property at the relevant date.
Lord Russell of Killowen said that a share is the interest of a . .
CitedBML Group Ltd v Harman and Another CA 8-Apr-1994
Shareholders of one class sought an order under section 371 which would have had the effect of overriding the class rights of another shareholder. The meeting was proposed to remove two directors who did not have the protection of a shareholder’s . .
CitedWelton v Saffery 1897
Lord Davey said: ‘Of course, individual shareholders may deal with their own interests by contract in such way as they may think fit. But such contracts, whether made by all or some only of the shareholders, would create personal obligations, or an . .
CitedRussell v Northern Bank Development Corporation Limited and Others HL 15-Jul-1992
Four directors of the company agreed with each other not to create further share capital. A director seeking to enforce the agreement, appealed against a judgment that the agreement was invalid in seeking to fetter the company’s stautory powers.
CitedIn re Sutherland, dec’d; Winter v Inland Revenue Commissioners HL 1963
The concept of a contingent liability was considered.
Held: In Scots law, a contingent liability is a liability which, by reason of something done by the person bound, may or may not arise depending on the happening of a future event.
CitedAlexander v Inland Revenue Commissioners CA 1991
The deceased’s flat in the Barbican was to be valued for Capital Transfer Tax. She bought it under right to buy at a substantial discount but subject to a time limited charge for that discount. She died within a year. The flat was subject to a . .
CitedIn re Lynall deceased CA 1968
Harman LJ said: ‘The sale envisaged by the section is, as is agreed, not a real but a hypothetical sale, and must be taken to be a sale between a willing vendor and a willing purchaser: see, for instance, the speech of Lord Guest in In re Sutherland . .
CitedDuke of Buccleuch v Inland Revenue Commissioners HL 1967
When a valuation was to be attributed to a property the test must be applied to the property as it actually existed and not to some other property, even if in real life a vendor would have been likely to make some changes or improvements before . .
CitedBrady v Brady HL 1988
An employment agreement contravening section 151 of the 1985 Act is unenforceable. The obvious mischief to which section 151 is directed is the case of a bidder financing his bid from the funds of the company acquired. The larger purpose had to be . .

Cited by:
CitedUBS Ag and Another v Revenue and Customs SC 9-Mar-2016
UBS AG devised an employee bonus scheme to take advantage of the provisions of Chapter 2 of the 2003 Act, with the sole purpose other than tax avoidance, and such consequential advantages as would flow from tax avoidance. Several pre-ordained steps . .

Lists of cited by and citing cases may be incomplete.

Income Tax, Capital Gains Tax

Leading Case

Updated: 10 November 2021; Ref: scu.396588