UT (Tax & Chancery) UT-2024-000088 - [2025] UKUT 00374 (TCC)

In his reply submissions, Mr Firth made the powerful argument that Abbott v Philbin does not identify the factors we have relied upon as being those relevant to determine whether receipt of the right or its realisation constitute the employee’s remuneration. To that point can be added the fact that Parliament has legislated extensively to address the consequences of Abbott v Philbin in some areas, but not this one. These points have given us real pause for thought.

However, we have ultimately concluded, like the FTT, that Abbott does not lead us to the conclusion that whenever a contingent right to a benefit of some kind is granted by an employer to an employee for their services, which someone could be persuaded to pay something for, that amount (and not the amount received) reflects the taxable remuneration:

Nor does the fact that Parliament has chosen to address aspects of Abbott in its core field of application (employee share options) lead us to the conclusion that it is otherwise to be treated as of general application to all forms of contingent right or to this right in particular.

The parties agreed, and the FTT found as facts, that Mr Saunders had left his employment on 31 July 2016; became non-resident the following day, and received the Payment in January 2017. The year 2016-17 was thus a “split year” and Mr Saunders received the Payment in the overseas part of that split year.

As we have found that the Payment constituted Mr Saunders’ employment earnings (Issue 1), we move on to consider whether it was nevertheless not taxable on him because it was “for” the non-resident part of 2016, and so excluded from taxation under ITEPA ss.15(1) and (1A).

The FTT summarised Mr Firth’s case as follows, see Decision, [61]:

“the making of the Payment, its timing and its amount were all dependant on extraneous events, outside of Mr Saunders’ control as an employee or former employee – the making of the Payment was triggered by the Sale, and the quantum was calculated by reference to the Fair Market Value of the Shares at the time the award was paid out rather than being directly attributable to the work of Mr Saunders in any earlier years. The Payment was, he submitted, a contingent and exceptional bonus, only ‘earned’ at the time of the Sale, which was in the overseas part of a split year. Had the Sale not occurred within two years of the end of his employment, no payment would have been made.”

The FTT rejected those submissions (see Decision, [62] – [65]), holding that the Payment was “earned by Mr Saunders for his services performed whilst he was resident in the UK and in respect of duties performed by him in the UK”.

We agree with the FTT. Our starting point is ITEPA s 16, which “applies for determining whether general earnings are general earnings ‘for’ a particular tax year”. It provides that “General earnings that are earned in, or otherwise in respect of, a particular period are to be regarded as general earnings for that period” and “if the period consists of the whole or parts of two or more tax years, the part of the earnings that is to be regarded as general earnings ‘for’ each of those tax years is to be determined on a just and reasonable apportionment”.

The statutory question is thus whether the Payment was “earned in or otherwise in respect of” the years when Mr Sauders was both employed by HAUKL and had vested rights under the SAR Agreement.

Mr Firth submitted that the Payment “had nothing to do with” the services Mr Saunders provided for HKAUL during his employment, but instead depended on the Sale, which was a wholly extraneous matter.

We disagree, for the same reasons as given by the FTT (see Decision, [62]), namely that:

As Ms Hicks said, “the prospect of a payment was part of the consideration in return for which the Appellant worked between 4 April 2013 (when he entered into the agreement) and 31 July 2016 (when his employment terminated)”. It follows that the payment was “for” the whole of that period.

In coming to that conclusion, we have not overlooked the submissions made by Mr Firth on Bray v Best. The facts of that case are summarised in the headnote as follows:

“The taxpayer was employed from 1958 to 1979 by G. Ltd. On 1 April 1979 he, together with all other employees of G. Ltd., was transferred to the employ of G. Ltd.’s parent company. Prior to, and in anticipation of, those transfers the trustees of two trusts formed for the benefit of G. Ltd.’s employees exercised powers to bring into effect provisions leading to their winding up and the distribution of their assets to the employees.”

The trusts had been set up by “an old established family company”. The company enjoyed very broad powers for distribution, accumulation or re-settling of capital (pp.169-170). In 1971 the family company was taken over by a much larger organisation, and the reason for the distributions in issue was that “the trustees anticipated that there might come a time in the future when the company’s work force would be absorbed by the parent company and they might either find themselves with no beneficiaries or find themselves unable effectively to restrict the beneficiaries to employees who had given service to the [family] company”.

The deeds of trust under which the payments were made to employees stated that (see p.170):

“The trustees shall within the nine months immediately following the termination date pay or provide for all liabilities mentioned in the definition of the terminal fund and apply the terminal fund by allocating thereout in respect of each eligible employee such a sum as the trustees shall in their absolute and unfettered discretion think fit but so that

A.

No eligible employee shall be entitled to receive as of right any sum allocated to him…”

The judgment records at p.171 that the trustees were concerned that the division of the funds should be conducted as fairly as possible, and that various computer printouts were obtained showing the effect of applying various formulae which attached different weights to length of service and salary scales. None of these was actually adopted, but they were used to form the basis for the ultimate allocation.

Mr Bray received £18,111. HMRC’s case was that this sum was “for” each of the tax years for which he had worked for his employer. Mr Bray’s case was that it was taxable only in the final year of his employment as a payment on termination under ICTA 1970, s 187, after deducting tax relief of £10,000 by virtue of s 188(3) of that Act.

The Special Commissioner could not, on the facts, find any feature of any significance which would indicate that the payment fell to be attributed either to the last year in which Mr Bray was employed, or to any or all of the previous years of his employment. He thus held that it remained taxable only as a termination payment subject to the statutory disregard of £10,000. The Court of Appeal and the House of Lords agreed, see Lord Oliver’s judgment at p.178. Lord Oliver said he was unable to deduce from the Special Commissioner’s decision “a finding that the payment either was, or was intended to be … additional remuneration for services rendered to the company in respect of the previous years in which the taxpayer was employed” (p.175).

However, Lord Oliver set out the ratio of the judgment as follows:

“the period to which any given payment is to be attributed is a question to be determined as one of fact in each case, depending upon all the circumstances, including its source and the intention of the payer so far as it can be gathered either from direct evidence or from the surrounding circumstances.”

In Mr Bray’s case there was “no feature of significance” which allowed the payment he received to be attributed to one or more of the years for which he worked for his employer. The trustees used their discretion to allocate the payments to the employees, and as Lord Oliver said at the end of his judgment:

“The mere fact that the seniority of the taxpayer as an employee was a matter taken into account in arriving at the amount of the distribution does not appear to me to be any indication that the payment determined upon and made in the year of assessment 1979–80 … can properly be treated as made for or in respect of any other period.”

Mr Saunders’ position is very different. The Payment was made by his employer, pursuant to SARs which had been awarded to him with the express purpose of incentivising his work during the period of his employment. That was a feature of significance.

Moreover, it is clear from Lord Oliver’s judgment that “the period to which any given payment is to be attributed is a question to be determined as one of fact in each case”. The FTT determined as a fact that the Payment was “for” the period from 4 April 2013 (when Mr Saunders entered into the SARs Agreement) to 31 July 2016, when he left his employment; in other words, that it was “for” the tax years 2012-13 through to 2015-16. Neither party addressed us on the well-known case law (see Edwards (Inspector of Taxes) v Bairstow [1956] AC 14, 36 TC 207 and subsequent judgments) which sets out when a finding of fact made by the FTT can be challenged on appeal. We note Mr Firth described the FTT’s finding as “an unreasonable conclusion” which we take to mean “a view of the facts which could not reasonably be entertained.” However, we have identified no basis on which the requirements in the Edwards v Bairstow case law have been met in relation to the FTT’s finding as to the periods for which the Payment was “for”.

We therefore dismiss the appeal in relation to Issue 2.

We add for completeness that although the Payment was “for” the tax years 2012-13 through to 2016-17, it is taxable in the year of receipt under ITEPA s 18. That was not in dispute.

For the reasons set out above, we dismiss the appeal on both Issues 1 and 2.

Any application for costs in relation to this appeal must be made in writing within one
month after the date of release of this decision and be accompanied by a schedule of costs
claimed with the application, as required by Rule 10(5) and (6) of the Tribunal Procedure
(Upper Tribunal) Rules 2008.