Capital treatment of share issue premium: forgone premium on shares issued at par is not a deductible trading expense.

The article addresses whether a company may deduct as a trading expense the market premium forgone when issuing shares at par to employees, concluding it is not deductible. It reasons the forgone premium is capital in nature, involves no cash disbursement or diminution of assets, and therefore is not an expense "wholly and exclusively" for the trade. Payments that discharge contractual trading liabilities or actual asset distributions used as remuneration remain deductible, but a non-realised premium on allotment is neither a trading outlay nor deductible; employee taxation of the benefit does not convert the company's non-receipt into a trading deduction.

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Issues: Whether, for the purposes of Schedule D, a company may deduct as a trading expense the amount equal to the market premium forgone when it issues shares at par to employees (i.e., whether the premium which the company might have obtained but did not obtain is a deductible expense wholly and exclusively laid out for the purposes of the trade).

Analysis: The question turns on the characterisation of the premium as between capital and trading receipts and on whether the company incurred any disbursement or expense "wholly and exclusively" for the purposes of the trade. Profits and gains must be ascertained on ordinary commercial principles by setting against income the cost of earning it. Premiums on issue of shares are not trading receipts but are capital in nature; issuing shares at par involves no actual outlay of the company's funds and does not diminish its assets. Authorities concerning deductions for rent or annual value of premises used in trade (as in Russell and Usher) are limited in their reasoning to the facts and statutory context of annual value and tied-house arrangements; they do not establish a general principle that every profit forgone is a deductible trading expense. A payment or transfer that discharges a contractual trading liability or is an actual distribution of an asset used as remuneration would be deductible; by contrast, an allotment of unissued shares at par that never produced the premium is not a cash disbursement nor a trading outlay. Weight v. Salmon supports taxation of the recipient on the value received, but Schedule E treatment of the employee's benefit does not compel treating the company's non-realised premium as an expense under Schedule D.

Conclusion: The premium which the company might have obtained but did not obtain on issuance of shares at par to employees is not deductible as a trading expense under Schedule D; the deduction is disallowed (result in favour of the revenue).

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