In Michael Saunders v HMRC [2024] TC09129, the First Tier Tribunal (FTT) found that a Long Term Incentive scheme payment made after an employee had left the UK was taxable because it was general earnings attributable to work done in the UK whilst still resident.

Non dom

Mr Saunders began working on 2 April 2008 and was resident in the UK during his employment up until 2016.

  • In March 2013 the UK firm's parent company adopted a Long-Term Incentive Plan (LTIP).
  • In April 2013, the appellant signed up to the LTIP and was granted (a)157,887 Stock Appreciation Rights (SARs) at a grant price of $1.32 and (b) 291,667 SARs at $1.38.
  • All the SARs from (a) vested on the day of the grant. From (b), 72,917 vested immediately but the remaining 218,750 vested in three equal instalments on 1 July 2013, 1 July 2014 and 1 July 2015 provided the appellant remained employed.
  • He ceased employment on 31 July 2016 and became Non-resident from August 2016.
  • In January 2017, the appellant received notice the parent company had been sold.
  • As the sale was within 24 months of the cessation of employment the appellant was entitled to a payment equal to the difference between the fair market value of the shares relevant to the SARs at the date he ceased employment and the grant price.
  • In January 2017, Mr Saunders received £1,236,956 from his former employer for his SARs. 
  • The payment was processed through payroll and was subject to deductions of PAYE and National Insurance Contributions of over £500k.
  • He drafted his tax return on the basis the payment was not taxable in the UK and claimed Split Year Treatment which gave rise to a repayment of the tax deducted.
  • HMRC issued a Closure Notice amending the return and including the amount as UK taxable income.
  • Mr Saunders appealed against the closure notice and the amendments to his return.

The First Tier Tribunal (FTT) found:

  • Both parties agreed that the SARs had been granted to the appellant because of his employment.
  • The FTT agreed with HMRC that both the deal payment and the SARs were earnings from the appellant's employment within s.62 ITEPA 2003 and earned in the period April 2013 to 31 July 2016.
  • The SARs had been granted and vested in connection with the employment. The purpose of the LTIP was to incentivise employees to remain employed.  The unvested SARs that were held only vested because the appellant remained in employment until the final vesting date of 1 July 2015.
  • The SARs were simple contractual contingent payment rights. They were not securities options, securities, or interest in securities and Part 7 ITEPA 2003 did not apply to them.
  • 2016/17 was a split year and the payment was received in the overseas part of the year. However, the payment was earned by the appellant for services performed whilst a UK resident and for duties performed by him in the UK.

The appeal was dismissed. The payment was earnings from employment taxable in the UK. It did not matter that the employment was not held when the payment was received.

Useful guides on this topic

Employment-Related Securities Update 2024
Employee shares, share options and shares schemes: a mini-CPD update on what's hot or not in Employment-Related Securities in 2023-24 and 2024-25.

Employment-Related Securities: Reporting
If an employer gives shares to an employee or sets up a tax-advantaged share or share option scheme, the benefit is taxed within the Employment-Related Securities (ERS) regime. The employer will then have a requirement to register a share scheme with HMRC and file an annual return by 6 July following the tax year-end.

SRT: Statutory Residence Test
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How to appeal an HMRC decision
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Closure notices
When does HMRC issue a Closure Notice? Can a taxpayer demand one? Are there appeal rights?

External link

Michael Saunders v HMRC [2024] UKFTT TC09129