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HMRC internal manual

Employment Related Securities Manual

Valuation Issues

Money’s worth


Where securities are acquired by an employee the earnings charge is under ITEPA03/S62 (see ERSM20500). The employment income is what comes to the employee in respect of the employment in money or money’s worth - the extent to which the asset received can be converted into money by the person receiving it less anything contributed by employee.

The acquisition of securities may be by a single employee, or under a formal scheme (an incentive scheme) set up by the company to cover large numbers of employees.

The concept is not new: as early as 1935 the House of Lords decided in Weight v Salmon(1935) 19TC174 that where company shares are made available to employees at a price below market value the “under value” represents monies’ worth taxable under Schedule E rules (ICTA88/S19).

The basis of the valuation is not derived from the legislation but derives from case law. It does not matter that the employee does not actually sell them or that they cannot be sold for a certain period, or without special permission. The employee still receives money’s worth as there are means, other than a sale of the legal title, to turn shares to pecuniary account - see Ede v Wilson and Cornwall (1945) 26TC381.

Tennant v Smith 3TC158

The “money’s worth” principle first emerged in Tennant v Smith (3TC158), a case concerning the provision of living accommodation to a bank manager. There it was considered by Lord Halsbury at p 164 that under Schedule E “money’s worth may be treated as money …. in cases where the thing is capable of being turned into money from its own nature” and by Lord Watson at p 167 that “profit …. in its ordinary acceptation appears to me to denote something acquired which the acquirer becomes possessed of, and can dispose of to his advantage, in other words money, or that which can be turned to pecuniary account”.

Weight v Salmon 19TC174

Weight v Salmon (19TC174) established that a perquisite or profit could arise where an employee was offered the opportunity to acquire shares in the company which employed him. In that case the difference between the amount payable for the shares and their market value was held to be assessable. Although the company’s shares were quoted, the particular shares issued to Mr Salmon had not at the time of allotment been admitted to listing. However, the fact that certain formalities needed to be carried out did not, per Lord Hanworth M R at p 187, prevent him having in “his hands something which, if so minded, he could have turned into a profit”. Also per Romer L J at p 191 “there being conferred upon him a privilege, which if he thought fit, could be made to produce a sum in cash in a very short time”.

Ede v Wilson and Cornwall 26TC381

Ede v Wilson and Cornwall (26TC381) concerned shares in a quoted company where two employees had given a verbal undertaking not to sell the shares without the permission of the directors, so long as they remained in employment. It was held, per Wrottesley J at p387 “ in the hands of the respondents the shares may not have the same value as would shares to which there was no such clog or tie” but they nevertheless constituted money’s worth because they were “capable of being turned into money from their own nature” and at p 388 “More over the respondents say that unless the shares can be turned into money during the year of assessment they are not taxable. This is, I think, going too far and would exclude a present of land made so late in the year that it could not be sold before the end of it …. Looking at the substance of the matter the respondents have received an advantage which is of such a nature that it can be turned into money”.

Bentley v Evans 35TC132

In Bentley v Evans (35TC132) the employee accepted an offer of shares from his employer at 85% of their then market value. He paid for the shares by deductions from salary and they were allotted to him in instalments over the following 13 months. Once allotted the shares were unrestricted. The Crown failed in its contention that a benefit arose when the shares were allotted, rather than when the offer was accepted. But the Court did not disturb a finding by the Commissioners that the value of the perquisite arising on the acceptance should be measured by reference to the then market value of the shares.

Abbott v Philbin 39TC82

In Abbott v Philbin (39TC82) Lord Reid said at p 122 “If you get a share it is capable of being turned to pecuniary account because you can immediately sell it. There is generally no difficulty about that, and if there is any difficulty there are other ways of raising money on it though you have to remain on the register”. These last words would include pledging the shares for a loan or selling only the beneficial interest.

Wilkins v Rogerson 39TC344

In Wilkins v Rogerson (39TC344) the measure of a non-money emolument (a suit) to an employee was considered to be, per Dankwerts J at p 350 “the value of the suit in his hands”, by Harman L J at p 353 “the value of it to him” and by Donovan L J at p 354 “its money value in the Respondent’s (taxpayer’s) hands, that is to say, what he could get for it if he sold it as soon as he received it”.

Heaton v Bell 46TC211

Heaton v Bell (46TC211) concerned the use of a car provided by the employer. Per Lord Reid at p 245 “there is no provision [in the legislation] for the valuation in money of other kinds of advantages which one might call perquisites…. It would be …. absurd to suppose that a transfer of shares, which can immediately be sold to produce money, should not be regarded as a money perquisite”. Also at p 247 “the recipient of a perquisite other than a sum of money can be assessed, and can only be assessed, on the amount of money which he could have obtained by some lawful means”. Per Lord Diplock at p 264 “it must not be supposed that a benefit in kind can escape all charge to tax as a perquisite by limitations upon the employee’s right to deal with it imposed by a contract, collateral to his contract of employment, into which he enters of his own volition”. Incidentally, at p 247 Lord Reid expressly rejected the notion (central to the “open market” approach) of an assumed sale to the highest bidder.