In Michael Saunders v HMRC [2025] UKUT 00374, the Upper Tribunal (UT) found that a payment made to an individual under their employer's Long-Term Incentive Plan after becoming non-UK resident was taxable as employment income. The payment was earned during his UK-based employment and was not attributable to the overseas part of the split tax year.
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, Mr Saunders 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 that 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 £500,000.
- Mr Saunders drafted his tax return on the basis that the payment was not taxable in the UK and applied Split Year Treatment, which gave rise to a repayment of the tax deducted.
- HMRC issued a Closure notice amending the return to include 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 that:
- Both parties agreed that the SARs had been granted to Mr Saunders because of his employment.
- It 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 interests in securities, so 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.
Mr Saunders appealed to the Upper Tribunal (UT), which found that:
- The SARs were granted and vested as part of Mr Saunders' employment and were designed to incentivise his continued service.
- The payment was made pursuant to the SAR agreement and was conditional on Mr Saunders being a 'good leaver'.
- The payment received was the relevant taxable receipt: the UT rejected the argument that the SARs themselves were the taxable event (as in Abbott v Philbin).
- The SARs were not readily monetisable, unlike the share options in Abbott, and their value was contingent on a future sale or liquidity event, an outcome outside of Mr Saunders' control.
- A realistic appraisal of the facts showed that the SARs were not a tradable asset class and could not be valued with certainty at the time of grant. Therefore, the payment received was the appropriate basis for taxation.
- The SARs were fundamentally different from the share options in Abbott, and the substance of the arrangement pointed to the payment being a reward for past employment services.
- The payment was also not attributable to the overseas part of the split tax year and was therefore not excluded from UK taxation.
- Although Mr Saunders received the payment after becoming a non-UK resident, it was earned during his UK employment between 2013 and 2016.
- The SARs were awarded to incentivise performance during that period, and the payment was part of the consideration for his services.
- The payment was not solely triggered by the sale event in 2017; the right to receive the payment was built into the employment arrangement. The payment was contractually linked to Mr Saunders' employment duties.
- The payment was 'for' the tax years 2012-13 through to 2015-16 and was taxable in the year of receipt (2016-17).
The appeal was dismissed. The payment was held to be employment income under s.62 ITEPA 2003 and was not attributable to the overseas part of the split year. It was therefore taxable in the UK.
Useful guides on this topic
Employment-Related Securities: Reporting
What are the reporting requirements for Employment-Related Securities (ERS)? When is the deadline? How do I register an ERS scheme? What are the penalties for failing to report ERS?
Residence v non-residence: tax treatment
What are the differences between being UK resident and non-UK resident for UK tax purposes?
SRT: Statutory Residence Test
What is the Statutory Residence Test (SRT)? Why is it important and how does it determine a person's residency?
SRT: Split Year Treatment
What is Split Year Treatment? When does it apply?
Globally mobile employees: National Insurance
What are my employer's National Insurance obligations when hiring an employee from overseas? What are my employer's Social Security obligations when sending an employee to work overseas? Do I have any PAYE reporting requirements concerning National Insurance?
Closure notices
When does HMRC issue a Closure Notice? Can a taxpayer demand one? Are there appeal rights?
How to appeal an HMRC decision
Disagree with an HMRC decision? How do you appeal, what type of decision can you appeal and what are your different options when you disagree with HMRC? What are the key steps in making an appeal?
External link