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

The SARs were not securities options, securities or interests but “simple contractual, contingent, payment rights” ([51]).

The decision in Abbott did not mean that “any deferred payment rights … should be treated as separate from any subsequent payment such that they are taxable on grant or award” (ibid).

The contrary argument overlooked the need for the employee to receive “something” (per Viscount Simonds) or the need to consider “the nature of the right” (per Lord Reid).

The FTT made this finding at [52] which, it must be said, offers something for both sides:

“We do not place any weight on Ms Hicks' submission that the value of the SARs could not be realised, either on entry into the SAR Agreement or on vesting as Mr Saunders did not acquire anything of money's worth. There was no evidence of fact or expert evidence as to value relevant to this submission before us, and whilst we consider that there would be considerable difficulties in trying to place a value upon the SARs (as such an exercise would have to take account of the potential Fair Market Value of the Shares, the likelihood of a Sale or Liquidity Event and the risk of Mr Saunders leaving as a bad leaver), we are reluctant to accept that these difficulties mean that the SARs had a value of nil. They had the prospect of paying out a large sum, as indeed happened here.”

The FTT concluded that there was not such a separation between the grant of the SARs and the receipt of the Payment as to break the causal chain with Mr Saunders’ former employment ([53]).

The Payment was part of the reward for services provided, being paid pursuant to an incentivisation plan to promote success of the Company ([54]).

The first is the description of the SARs as “simple contractual, contingent payment rights (Decision, [51]). The SARs were a vested right to be paid a sum of money on the occurrence of certain events and provided certain conditions (employment status, or the manner of its termination, and a time condition) were met. The share options in Abbott were also contractual rights, and the acquisition of shares pursuant to them contingent on (a) exercise and (b) continuing employment status. A share option does not give the holder a proprietary interest in any specific shares.

Nor do we accept, as Ms Hicks submitted, that the fact that the option was immediately exercisable on grant in Abbott but not in this case provides, of itself, a relevant point of distinction. That contention was rejected by the Court of Appeal in Charman [33], where Arnold LJ stated:

“Mr Charman pointed out that, in Abbott v Philbin, the option was immediately exercisable although it was not transferable. She submitted that the result would have been different if the option had not been immediately exercisable. I do not accept this. The reasoning of the majority was that the option could be “turned to pecuniary account” (in the words of Lord Watson in Tennant v Smith [1892] AC 150, 159 ) as soon as it was granted. This was not because it was immediately exercisable, but because it had a financial value which could immediately be realised in one way or another: see Viscount Simonds at pp 365–366 (“there could be no difficulty in the grantee arranging with a third party that he would exercise the option and transfer the shares to him”), Lord Reid at p 371 (“I find nothing to indicate that there would have been much difficulty in finding someone who would have paid a substantial sum for an undertaking by the appellant to apply for the shares when supplied with the purchase money and called upon to exercise the option and thereupon to transfer the shares”), pp 373–376 and Lord Radcliffe at pp 378–379 (“he could also at any time, at his choice, sell or raise money on his right to call for the shares”). As all three members of the majority recognised, the fact that the option was not transferable affected the value of the option upon grant, but did not alter the fact that it had some value. This reasoning would be equally applicable to an option which was not yet exercisable, but which could immediately be turned to account in a similar way.”

However, we accept that the inability to exercise the right until some future event has occurred may, in some circumstances, be a relevant factor when the court is required to identify what realistically constitutes the taxable remuneration.

While we accept notional consideration was paid for the options in Abbott to make them legally binding (see Lord Denning at p.383), we do not regard this as a sufficiently distinguishing feature. Consideration was provided for the SAR Agreement in the form of Mr Saunders’ work for the company (assuming that consideration was required under the law of contract in the Republic of Iceland, which governed both the Hibernia LTF Plan and the SAR Agreement).

As we have noted, share options (and particularly those in a listed company, as were in issue in Abbott) are a well-recognised and widely traded asset class, and one which often replicates the economic rights of share ownership. These are factors which weigh in favour of a realistic determination that the grant of such an asset was itself the employee’s remuneration.

By contrast, the same is not true of the highly contingent right constituted by the SARs. The economic value of the SARs in this case is not one which rises and falls with the value of the Company generally, but is specifically linked to the occurrence of one of two forms of one-off transaction (a Sale or a Liquidity Event).

The House of Lords in Abbott was clearly of the view that there would be little practical difficulty in ascertaining the value of the option on grant (see [37(2)] above). However, determining the value of the SARs at time of grant would be a much more difficult task, with an intrinsically greater room for dispute. The FTT referred to the “considerable difficulties” in in placing a value on the SARs. Those difficulties were not the result of some external event (such as temporary illiquidity in the market) but reflected the inherent nature of the right. While we do not accept Ms Hicks’ submission that on the basis of [52] we should treat Mr Saunders as having failed to meet the burden of proof of showing that the SARs could be monetarised at all (which we believe to be inconsistent with a fair reading of [52] as a whole), we are persuaded that it is a relevant factor when determining on a realistic basis whether the employee’s remuneration is the grant or the realisation. Where valuing the former is very difficult with great scope for dispute, that supports treating the amount realised as the remuneration.

In Abbott, once the options were granted, the only conditions on their exercise were largely in Mr Abbott’s control: continuing in employment, and exercising the options before they expired. In the case of the SARS, there was no finding that Mr Saunders had any control over the occurrence of the Sale or Liquidity event: he had left his employment in July 2016, and was only informed of the Sale in January 2017.

The amount of profit made in Abbott depended on Mr Abbott’s decision as to when to exercise the options over time, with the Company having no control over when he did so. Maximising the economic benefits to be derived from the options thus depended on his “judicious assessment”. In this case, by contrast, Mr Saunders makes no decision after the grant of the SARs which determines when and in what amount payments will be received pursuant to the SARS, nor is any amount so received the product of his “judicious assessment”.

Mr Saunders’ employer retained a significant influence as to whether or when there would be a Liquidity Event or Sale and on what terms, those factors essentially being the result of decisions taken in course of the Company’s business. By contrast, the movement in share price in Abbott was much less directly linked with the decisions and action of the company (and certainly did not depend on the decision to enter into a particular transaction).

Lottery tickets are bought and sold in huge numbers on a daily basis.

There is no difficulty in valuing a lottery ticket at the date of grant: it is the cost of the ticket.

Whether the ticket is a winning ticket or not turns on matters wholly extraneous to the employer, its performance or any decisions it makes.

The odds of winning are so remote and utterly dependent on chance, such that the prize cannot realistically be said to be something paid by the employer to the employee at all.