The recent case of Barrie Macey TC 787 is the latest (although probably not the last) in a long series of cases relating to inducements to enter into a contract of employment.
This decision perhaps demonstrates a change in the judicial approach to such inducements and (unless there is a successful appeal) probably consigns decisions such as Vaughan-Neil and Pritchard v Arundale to the judicial recycle bin.
Mr Macey was a partner in Ernst & Young and was encouraged to take up employment with a bank. He was to be paid a substantial salary, and he received some restricted stock units in the bank which were specifically to compensate him for disadvantages from giving up his partnership with Ernst & Young.
Mr Macey probably took considerable comfort from the case of Vaughan-Neil v CIR in which a barrister was paid £40,000 as an inducement to give up his status as a practicing barrister. The Revenue accepted that this payment was not taxable as earnings. In Jarrold v Boustead, a rugby player received a signing-on fee for joining a rugby league club as a professional, and the payment was not taxable, being the compensation for loss of his amateur status. Perhaps more relevantly in Pritchard v Arundale, a chartered accountant was encouraged to become an employee of a company and received shares in that company as a contractual inducement to do so. (The shares were actually transferred from another shareholder, but there is no doubt they were an inducement for him to take up the employment − and were made under a tripartite contract anyway).
Strangely, none of these authorities was even considered by the Tribunal (although they did appear in a list), the decision being that “the one off award of restricted stock units was granted as an inducement for the appellant to enter into the contract of employment with Morgan Stanley”. Well yes − but that was exactly the position with Pritchard v Arundale; one of the terms of the contract relating to the employment was that Mr Arundale would receive a specified number of shares in the employer company. Similar considerations apply to the other cases. Of course the payment, or the receipt of shares, was an inducement to take up the employment, but that is not the end of the matter. Mr Vaughan-Neil gave up his status as a barrister; Mr Boustead gave up his status as an amateur rugby player; and Mr Arundale gave up his established position and status as a practising chartered accountant receiving shares in compensation. Mr Macey also gave up his established position and status as a chartered accountant receiving stock units in compensation. However, 1971 was a long time ago, and it is perhaps instructive that the Tribunal did not even trouble to consider any of these cases; maybe they are not relevant anymore.
(One factor which might have distinguished Mr Macey’s case from the earlier authorities is that his restrictive stock units were only able to be realised after he had been employed by the bank for two years. This contrasts sharply with Mr Arundale, who received his shares prior to commencing work, and had he died before commencing his employment they would not have been forfeited. However, we do not know whether this is important, as it was not considered by the Tribunal).
Although it was not mentioned and therefore not relevant to the decision, there seems to be a much more compelling argument in favour of HMRC deriving from Part 7 of ITEPA 2003, which brings into charge securities acquired by a person by reason of his employment − including prospective employment. The importance here is that Section 421B ITEPA 2003 provides that when a right or opportunity to acquire securities is made available by a person’s employer (or by a person connected with a person’s employer), it is deemed to be made available by reason of the employment − and this would seem to trump all arguments on Pritchard v Arundale lines.
Under the circumstances, this remains a rather curious decision.