Michael Saunders v The Commissioners for HMRC

For employment-income purposes, a contingent right granted by an employer is not invariably taxable by reference to its value when granted. The court must make a realistic appraisal of the facts and consider the substance of the arrangement. Relevant factors include the nature and marketability of the right, the difficulty of valuing it at grant, the extent to which the employee controls the relevant conditions and realisation, and the employer’s influence over the payment event. A highly contingent right dependent on a transaction controlled substantially by the employer may be taxable when the resulting payment is received. Earnings are “for” the period to which they relate, determined on a just and reasonable basis, but are taxable in the year of receipt.

The appellant received a substantial payment in January 2017 under stock appreciation rights granted by his former UK employer in 2013. He had ceased employment and become non-UK resident before the payment. The First-tier Tribunal dismissed his appeal, holding that the payment was employment income under ITEPA 2003 and was earned for UK-resident periods of employment. The appellant appealed to the Upper Tribunal, arguing that the taxable event was the grant of the rights, relying on Abbott v Philbin, and alternatively that the payment was attributable to the overseas part of a split year.

1. Appeal dismissed. The payment was earnings and was taxable in the year of receipt. It was attributable to the periods during which the appellant worked in the UK, rather than to the overseas part of the split year.
2. Under s.62 of ITEPA 2003, the question is whether the payment was paid in return for acting as or being an employee, or arose from the employer-employee relationship. The court must consider substance rather than legal form and adopt a realistic appraisal of the facts.
3. The court rejected any suggestion that the appellant could be taxed both on the value of the rights when received and again on their realisation without clear statutory words. However, the rights here were materially different from the readily marketable share option in Abbott v Philbin. They were highly contingent, linked to a one-off sale or liquidity event, difficult to value at grant, substantially outside the appellant’s control, and materially influenced by the employer’s business decisions. Those cumulative factors meant that the payment, rather than the grant of the rights, constituted the taxable remuneration.
4. The court adopted the analysis in Charman v Revenue and Customs Commissioners that the ratio of Abbott v Philbin concerned the time at which the option became taxable, while the proposition that later profit did not arise from employment was obiter. The statutory changes addressing share options did not make Abbott generally applicable to every contingent right.
5. For split-year purposes, s.16 required the court to determine whether the payment was earned in or otherwise in respect of a particular period. The incentive plan’s purpose and its employment and leaver conditions showed that the prospect of payment formed part of the consideration for services from the grant of the rights until termination. The FTT’s factual attribution of the payment to those periods disclosed no Edwards v Bairstow error.
6. The payment was received in the tax year 2016–17 and was therefore taxable in that year under s.18, notwithstanding that it was “for” earlier tax years.

• Upper Tribunal (Tax and Chancery Chamber): appeal from the First-tier Tribunal dismissed on both issues.
• First-tier Tribunal: appeal against HMRC’s assessment dismissed on 2 April 2024.