Employee share options may be taxable when granted if the option itself has pecuniary value, not only on exercise.

A non-transferable employee option to buy shares at a fixed price was treated as a taxable perquisite when granted, because the employee acquired a valuable contractual right capable of being turned to pecuniary account. The option's non-transferable character did not remove its value, and any later monetisation through third-party arrangements or sale after exercise did not change that analysis. Later appreciation in the shares was not a fresh employment-related perquisite, because that increase came from market forces rather than the office itself. The earlier view that the option was valueless until exercise was rejected, and the assessment based on a gain arising at exercise could not stand.

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Issues: Whether the grant of a non-transferable option to purchase shares at a fixed price constituted a taxable perquisite or profit under Schedule E, or whether tax could be levied only when the option was exercised and the shares were acquired at an undervalue.

Analysis: The majority held that the relevant taxable advantage arose when the option was granted, because the employee then acquired a valuable contractual right capable of being turned to pecuniary account. The non-transferable nature of the option did not deprive it of value, since the right could still be monetised in substance by arrangements made with third parties or by exercise followed by sale of the shares. The majority further held that the later appreciation in the market value of the shares did not create a fresh perquisite from the employment in the year of exercise, because that increase was attributable to market forces and not to the office itself. On that basis, the reasoning in the earlier Scottish decision treating the option as valueless until exercise was rejected.

Conclusion: The option was the taxable perquisite, not the later gain on exercise, and the assessment on the amount arising at exercise could not stand.

Ratio Decidendi: A service-related option to acquire shares at a fixed price is a taxable perquisite when granted if it is a valuable right capable of being turned to pecuniary account; later appreciation realised on exercise is not a separate perquisite from the employment.

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