In M Saunders v HMRC [2024] UKFTT 300 (TC)), the FTT has held that a cash payment received by an ex-employee pursuant to the terms of ‘share appreciation rights’ (SARs), awarded under an L-TIP established by the holding company of his former employer company, fell to be taxed as employment income when received. It was not, as the appellant contended, a sum derived from the SARs which, in line with Abbott v Philbin [1961] AC 352, fell to be charged to income tax only when first awarded (as ‘money’s worth’ which constituted an emolument of the employment at that time).
Under the terms of the SARs, Mr Saunders was entitled to a payout of an amount, calculated by reference to growth in value of shares in the holding company, if his award had ‘vested’ when he ceased employment and, if the company was, inter alia, sold within two years after he ceased employment. In the event, the company was sold within two years after Mr Saunders had ceased employment holding vested SARs. The substantial sum to which he therefore became entitled was received by him in the overseas portion of a split tax year in which he became permanently resident outside the UK. Even if the payment was of general earnings, it was, so he argued, outside the scope of the charge to UK income tax as being attributable to the overseas part of a split year (per ITEPA 2003 s 15(1A)(a)).
Rights under such SARs are neither securities nor securities options and do not fall within the scope of the charging provisions in ITEPA 2003 Part 7. What Mr Saunders was granted was a conditional entitlement to future payment of a cash sum of an amount dependent upon growth in value of shares in the grantor company.
In Abbott v Philbin, the option purchased on favourable terms by the employee was ‘something’ that could be turned into money (albeit that, by its terms, it was non-transferable). The terms of the option did not link its exercise to continued employment or the circumstances in which Mr Abbott might cease to hold the employment. It was the acquisition of the option itself which was the taxable perquisite from employment and not the gain realised upon subsequent exercise of that option. The gain realised upon its exercise was derived from that asset, not from the employment. (That decision was, of course nullified, at least in relation to the grant of ‘rights to acquire employment-related securities’, by what is now ITEPA 2003 Part 7 Chapter 5. However, it is still good law to the extent that it has not been reversed by statute.)
The question for the FTT was whether, in this case, the SARs amounted to ‘something’ which was itself an emolument of the employment taxable when acquired by the employee, or whether the sum eventually paid, being an amount paid pursuant to what was a conditional contractual entitlement to a sum of money, was derived from the employment, not from that ‘something’. The FTT held that the receipt of the payment arose from the employment relationship, not from the SARs. The terms of the SARs were closely linked to the employment. It did not matter that the quantum of payment was not directly and specifically linked to the performance of the duties of that employment. It was part of the reward for his services and comprised general earnings for the period of his employment since the award was made. By reason of ITEPA 2003 s 17, the general earnings were ‘for’ the last of those earlier tax years but, by reason of s 18, were taxable in the tax year of receipt. It was not attributable to the overseas part of the split tax year in which it was received.
The decision did not explore the parameters of exactly what would amount to the grant of rights (not being rights to acquire securities) which is taxable as an emolument at the time of grant per Abbott v Philbin, but was content to rely upon the idea that the sum eventually paid derived from the employment, not from such rights. The question is important in the context of identifying the correct UK tax treatment of different forms of employment-related cash-based incentive awards made by US and other overseas companies to internationally-mobile employees. Does a liability to UK employment taxes arise at grant/award (per Abbott v Philbin), or only at the later time when the benefit of the award is satisfied by a cash payout? This decision suggests that it is difficult to craft a form of contingent contractual entitlement to a cash sum linked to ongoing employment which amounts to something capable of being converted into money or something of direct monetary value so as to be a taxable emolument when first received.
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When, if ever, does Abbott v Philbin still hold good?
Lessons from a recent case.
In M Saunders v HMRC [2024] UKFTT 300 (TC)), the FTT has held that a cash payment received by an ex-employee pursuant to the terms of ‘share appreciation rights’ (SARs), awarded under an L-TIP established by the holding company of his former employer company, fell to be taxed as employment income when received. It was not, as the appellant contended, a sum derived from the SARs which, in line with Abbott v Philbin [1961] AC 352, fell to be charged to income tax only when first awarded (as ‘money’s worth’ which constituted an emolument of the employment at that time).
Under the terms of the SARs, Mr Saunders was entitled to a payout of an amount, calculated by reference to growth in value of shares in the holding company, if his award had ‘vested’ when he ceased employment and, if the company was, inter alia, sold within two years after he ceased employment. In the event, the company was sold within two years after Mr Saunders had ceased employment holding vested SARs. The substantial sum to which he therefore became entitled was received by him in the overseas portion of a split tax year in which he became permanently resident outside the UK. Even if the payment was of general earnings, it was, so he argued, outside the scope of the charge to UK income tax as being attributable to the overseas part of a split year (per ITEPA 2003 s 15(1A)(a)).
Rights under such SARs are neither securities nor securities options and do not fall within the scope of the charging provisions in ITEPA 2003 Part 7. What Mr Saunders was granted was a conditional entitlement to future payment of a cash sum of an amount dependent upon growth in value of shares in the grantor company.
In Abbott v Philbin, the option purchased on favourable terms by the employee was ‘something’ that could be turned into money (albeit that, by its terms, it was non-transferable). The terms of the option did not link its exercise to continued employment or the circumstances in which Mr Abbott might cease to hold the employment. It was the acquisition of the option itself which was the taxable perquisite from employment and not the gain realised upon subsequent exercise of that option. The gain realised upon its exercise was derived from that asset, not from the employment. (That decision was, of course nullified, at least in relation to the grant of ‘rights to acquire employment-related securities’, by what is now ITEPA 2003 Part 7 Chapter 5. However, it is still good law to the extent that it has not been reversed by statute.)
The question for the FTT was whether, in this case, the SARs amounted to ‘something’ which was itself an emolument of the employment taxable when acquired by the employee, or whether the sum eventually paid, being an amount paid pursuant to what was a conditional contractual entitlement to a sum of money, was derived from the employment, not from that ‘something’. The FTT held that the receipt of the payment arose from the employment relationship, not from the SARs. The terms of the SARs were closely linked to the employment. It did not matter that the quantum of payment was not directly and specifically linked to the performance of the duties of that employment. It was part of the reward for his services and comprised general earnings for the period of his employment since the award was made. By reason of ITEPA 2003 s 17, the general earnings were ‘for’ the last of those earlier tax years but, by reason of s 18, were taxable in the tax year of receipt. It was not attributable to the overseas part of the split tax year in which it was received.
The decision did not explore the parameters of exactly what would amount to the grant of rights (not being rights to acquire securities) which is taxable as an emolument at the time of grant per Abbott v Philbin, but was content to rely upon the idea that the sum eventually paid derived from the employment, not from such rights. The question is important in the context of identifying the correct UK tax treatment of different forms of employment-related cash-based incentive awards made by US and other overseas companies to internationally-mobile employees. Does a liability to UK employment taxes arise at grant/award (per Abbott v Philbin), or only at the later time when the benefit of the award is satisfied by a cash payout? This decision suggests that it is difficult to craft a form of contingent contractual entitlement to a cash sum linked to ongoing employment which amounts to something capable of being converted into money or something of direct monetary value so as to be a taxable emolument when first received.
