Bray (Inspector of Taxes) v Best

Factual and Procedural Background

In 1957 and 1963 Company A created two employee benefit trusts designed to acquire its shares and, in due course, distribute value to employees. In August 1977 Company A was taken over by Company B. Anticipating a transfer of all staff to Company B on 1 April 1979, the trustees varied the deeds on 15 March 1979 so that, when the trusts were wound up, the remaining assets would be allocated among “eligible employees.” On 29 March 1979 the trust periods were terminated; the next day notice of the imminent distributions was posted. Within the fiscal year 1979-80 the trustees resolved on individual allocations, using a formula that blended length of service and salary while capping differentials.

Pursuant to those resolutions, the Respondent (a senior employee with continuous service since 1958) became entitled to £18,111. The Appellant Inspector assessed that sum as Schedule E income, spreading it proportionately over every assessment year from 1958-59 to 1978-79; alternatively, he assessed the whole amount in 1978-79. The Special Commissioner held the payments were indeed “emoluments” but not attributable to any earlier assessment year, so none of the assessments could stand. The High Court reversed; the Court of Appeal reinstated the Commissioner’s decision; and the House of Lords, whose opinion is summarised here, dismissed the Appellant’s further appeal.

Legal Issues Presented

1. Whether sums distributed from the employee trusts to the Respondent after his employment ended were “emoluments” from that employment for the purposes of Schedule E.
2. If they were emoluments, whether they had to be attributed to one or more specific years of assessment during which the employment subsisted, or could only be attributed to the year 1979-80 (after the employment had ceased).

Arguments of the Parties

Appellant's Arguments

• The distributions were described by the Special Commissioner as a “reward for services” and therefore constituted remuneration for the Respondent’s entire period of service.
• An emolument must by definition be “for” a period in which services were rendered; if no single year can be identified, a fair apportionment over every year of service is permissible under the Taxes Management Act 1970, s 29.
• Unless the Respondent could point to a different, precise period, the Inspector’s “best-of-judgment” apportionment had to stand under s 50(6) of the 1970 Act.

Respondent's Arguments

• Although the payment arose from the employment, nothing linked it factually to any particular year or years of service; it was determined and became payable only in 1979-80.
• Under the “source” principle, a Schedule E charge requires the coexistence of the payment, the source, and the assessment year; because the employment had ended before 1979-80, no Schedule E charge could arise.
• If the Inspector’s approach were correct, the statute would compel arbitrary, un‐principled allocations that the evidence could not sustain.

Table of Precedents Cited

Court's Reasoning and Analysis

The House of Lords accepted that the payments were emoluments from the Respondent’s former employment; however, Schedule E also requires that the emolument be for the relevant year of assessment. The Court emphasised:

• The phrase “reward for services” merely indicates that the payment derived from the employer-employee relationship; it does not compel the conclusion that the money is remuneration for particular past years.
• Whether an emolument is for a given year is a pure question of fact. Attribution to earlier years is only permissible where the evidence links the payment to those years.
• The Special Commissioner found nothing—either in the trust deeds, the trustees’ motives, or the computation formula—to suggest that the allocation related to any specific period of service. That factual finding was unimpeachable.
• Because the only plausible assessment year was 1979-80, and the employment (the source) had ceased before that year, the “source” doctrine barred any Schedule E assessment.
• The Inspector’s fallback of spreading the payment across all employment years was characterised as an arbitrary “best-of-judgment” exercise unsupported by evidence and therefore unlawful.

Holding and Implications

Appeal dismissed.

Consequently, the assessments under Schedule E for the years 1958-59 to 1978-79 were invalid. The Respondent remains liable only to the limited charge under sections 187-188 for 1978-79 (amounts exceeding £10,000). The decision confirms that:

• Even when a payment clearly arises from employment, it is taxable under Schedule E only if it can be factually attributed to a chargeable period during which the employment existed.
• Attribution is a factual enquiry; courts will not invent or impose artificial periods merely to create a charge.
• The “source” doctrine continues to operate as a substantive limit on Schedule E liability, particularly where employment has ceased before receipt.