The taxpayer was the managing director of a limited company and
had a service agreement under which he was entitled to a fixed
salary. In addition, each year the directors of the company passed
a resolution giving him the privilege to buy some of the company's
shares at their par value (that is, their face value), which was
considerably less than their current market value. He duly
purchased and retained the shares. Earlier resolutions had said
that this privilege was granted having regard to the 'eminent and
special services' that the managing director had performed for the
company, but the resolutions for the years under appeal made no
reference to his services.
The managing director appealed against his tax assessment,
claiming that as he had not sold the shares he had received no
profit, and thus no earnings on which to be taxed (see generally
EIM00515 onwards). The Courts agreed
with the Inland Revenue that the shares themselves were emoluments,
or earnings. The taxpayer was chargeable on the difference between
the market value of the shares and the amount that he had paid for
them.
A similar point arose in Ede v Wilson (26TC381). In that case, a group of employees were allotted shares on the condition that, as long as they continued to work for the company, they could not sell them without the permission of the company's directors. The Court held that the shares were still emoluments, or earnings, even though there was a restriction on sale. The restriction was simply a factor to be taken into account in determining the value of the earnings.
