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

The Appellant was employed by HAUKL between 2 April 2008 and 31 July 2016.

Throughout the period of employment, the Appellant worked in, and was resident in, the UK. HAUKL was likewise resident, with a permanent base, in the UK.

On 14 March 2013, the board of Hibernia Group ehf (HAUKL’s parent company registered and incorporated in Iceland) adopted the Hibernia Group ehf 2013 Long Term Incentive Plan (the “Hibernia LTI Plan”).

On 4 April 2013, the Appellant entered into an Agreement for Stock Appreciation Rights with Hibernia Group ehf (the “SAR Agreement”). Pursuant to the SAR Agreement the Appellant was granted: (1) 157,887 SARs at a grant price of $1.32; and (2) 291,667 SARs at a grant price of $1.38.

All of the 157,887 SARs at a grant price of $1.32 and 72,917 of the SARs at a grant price of $1.38 were vested on the date of the grant, being 4 April 2013. The remaining 218,750 SARs were vested in three equal instalments on 1 July 2013, 1 July 2014 and 1 July 2015 in accordance with the terms of the Hibernia LTI Plan as the Appellant remained employed.

On 31 July 2016 the Appellant ceased his employment with HAUKL.

The Appellant became non-resident in the UK on 1 August 2016.

On 9 January 2017 the Appellant received notice that Hibernia NSG (the successor parent company of HAUKL registered and incorporated in Ireland) had been sold to GTT Communications Inc, which constituted a sale for the purposes of the Hibernia LTI Plan and the SAR Agreement.

As the sale occurred within 24 months of the Appellant leaving his employment, this resulted in a payment of cash equal to the amount by which the then current Fair Market Value of the Shares, to which the vested SARs related, exceeded the Grant Price.

As a result, the Appellant received the Payment in the sum of £1,236,956 from HAUKL. The Payment was processed through the Employer’s payroll on 13 January 2017 and was subjected to deductions of £549,679.26 PAYE and £26,405.08 Class 1 Primary (Employee’s) NICs at source.

In his self-assessment tax return for the year 2016/17, the Appellant claimed the split-year treatment (within the meaning of Part 3 (case 3, para 46) to Schedule 45 of the Finance Act 2013) applied in respect of 2016/17. He recorded the Payment as both (1) “Tips and other payments not on your P60” on the employment page and (2) “Foreign earnings not taxable in the UK” on the additional information page. This resulted in a repayment of tax in respect of the tax deducted at source by HAUKL on 22 May 2017.

On 9 March 2018 HMRC opened an enquiry into the Appellant’s 2016/17 tax return under s.9A Taxes Management Act (“TMA”) 1970. Following the enquiry, HMRC issued a closure notice, amending the tax return on the basis that the Payment originally claimed as foreign earnings not taxable in the UK was, in their opinion, subject to UK income tax. An assessment was issued under s.28A TMA 1970 for the additional tax, bringing the total income tax owed to £504,109.25.

Participants would be granted a SAR through a SAR Agreement which, in broad terms, involved a promise to pay a sum of money to the Participant representing the amount of the increase in the Group’s share price from a stipulated base in the event of a transaction involving a sale of 43% or more (but less than all) of the Hibernia Group ehf’s shares (“a Liquidity Event”) or a sale or exchange by the then existing shareholders of all their shares (“a Sale”).

If the consideration payable on the Liquidity Event or Sale was not cash but shares, the SAR could be settled by allocating an appropriate portion of those shares.

The SARs gave no rights as shareholders or any form of security.

Each SAR would vest in respect of 25% of the SARS on completion of each year of service through the first to fourth anniversaries of the date of grant.

Where a participant terminated their service with the group for certain acceptable reasons (i.e. the participant was a “Good Leaver”), then the portion of any SAR referable to that year of service would vest. So far as vested SARs are concerned, a participant’s entitlement to payment was conditional upon the Sale or Liquidity Event happening within 2 years of termination.

If the participant’s employment was terminated in other circumstances (i.e. for wilful misconduct, negligence or other specified reasons) all SARs (vested or unvested) were forfeit.

Subject to that two-year period, the term of the SAR would ordinarily be 15 years from Grant.