UT (Tax & Chancery) UT-2024-000088 - [2025] UKUT 00374 (TCC)

As Lord Walker noted in Grays Timber Products Ltd v Revenue and Customs Commissioners [2010] UKSC 4, [5]-[6], the judgment in Abbott caused some difficulties:

“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.”

The Abbott decision was reversed by s.25 of the Finance Act 1966. Reflecting the ability of legislation to resolve a problem from multiple perspectives, this provided that the grant of a share option was not taxable as employee remuneration at the date of grant, but the proceeds of realisation were taxable (i.e. resolving the issue of “double taxation”). However, s.78 of the Finance Act 1972 carved out of the scope of s.25 certain socially and economic valuable share options (so-called “restricted securities”) which were not taxable either when the right was received or where it was realised, unless the option was “in the money” for the employee when granted, in which case it was taxable to that extent at that point (s.78(2)). Various amendments were subsequently made, including by ss.135 and 185 of the Income and Corporation Taxes Act 1988 (“ICTA 1988”).

As Lord Walker noted in Grays Timber, [7], the different tax treatment of certain kinds of share option schemes offered ample scope for tax avoidance. In response, the provisions applicable to the taxing of share options was subject to extensive legislation, initially in the form of s.140A to 140C amending ICTA 1988 and thereafter in Part 7 of ITEPA 2003. We will not attempt to summarise those provisions, beyond noting that, as would be expected, they address when options are taxed on grant, on realisation, or on other forms of disposal.

There are two points we would make about the legislative response. The first is that it has involved a complex and iterative process of determining what can be taxed and when, and how to address measures which seek to avoid the imposition of tax or to secure a more preferential tax treatment than is justified. The second is that, to the extent that Abbott v Philbin embodies a binding interpretation of what constitutes an emolument from employment, there has been no statutory intervention which renders that interpretation inapplicable in this case.