Michael Saunders v The Commissioners for HMRC

This issue is essentially one of statutory construction and the application of the statute as properly construed. HMRC contend that the Payment constitutes “earnings” for the purpose of s.62 ITEPA 2003, and specifically that it is “an emolument of the employment”. In answering this question:

It was not part of HMRC’s case at the FTT that Mr Saunders was taxable on both the value of the vested rights when he obtained them, and also on the Payment, and HMRC’s skeleton argument for this hearing similarly did not put forward that argument. However, in the course of oral submissions on behalf of HMRC, Ms Hicks said that a double charge was possible. We disagree. It would take clear words indeed before legislation would allow the employee to be taxed on both the value of the right received and its subsequent realisation (see by analogy Forde and McHugh Ltd v Revenue and Customs Commissioners [2014] UKSC 14, [15]-[16]). A court would also seek a clear statutory basis for making the taxable event depend on whether or not the employee chose to realise the right conferred in some way other than awaiting the occurrence of the contingencies (not least because it would involve differential tax treatment of employees in receipt of the same right).

Subject to two points to which we will come, approached by reference to the principles set out above, and on the basis of the agreed facts, we agree with the FTT that the answer to the question “whether the payment of £1,236,956 received by Mr Saunders from HAUKL constitutes ‘employment income’ for the purpose of s.62 of ITEPA 2003” is clearly yes. We can do no better than adopt the FTT’s summary of its reasons for reaching that conclusion:

The two points to which we referred above are (a) an argument of principle, and (b) the binding effect of the decision in Abbott v Philbin. They are closely related, because that same issue of principle is also at the heart of the decision in Abbott v Philbin.

There is an obvious distinction between (a) an employee’s remuneration, and (b) the value which the employee subsequently acquires through the economic exploitation of that remuneration. The former would naturally be taxed as employment income, the latter not (although it may be subject to some other form of taxation, e.g. capital taxes or taxes on non-employment income).

That distinction can be justified on two, essentially complementary, bases:

As a matter of first impression, and without regard to any specific legislative interventions and any tax avoidance arrangements, if an employee was remunerated by his employer transferring shares in a company to him on an unrestricted basis, the value of that receipt would be regarded as employment income. Any appreciation in those shares subsequently, or dividends paid to shareholders in future years, would not be so regarded (any more than a fall in value of shares after transfer would be regarded as diminishing the amount of remuneration received). Indeed, the value of the shares when acquired will reflect contemporaneous market perception of the likelihood of future dividends.

Once we move beyond that simple example, matters soon become more complex. If the employer gives the employees not shares, but an option to acquire shares at a favourable price, is it the option which represents the remuneration, by reference to its market value at the date of grant, or the profit made if and when the option is exercised: see Abbott v Philbin on which the House of Lords split 3:2. We observe that:

Matters become more difficult still when moving beyond (a) options to acquire shares at a particular strike price (a widely known asset class, which in many iterations is traded in enormous volumes on the world’s financial markets) to (b) other forms of contingent right. To take an extreme example of the latter, what of an employee whose salary is payable in arrears, and who can “factor” that contingent right so as to raise money in advance? Is the taxable receipt then the market value of the accrued right to salary, rather than the money eventually paid by the employer? If that were the position, it would mark a fundamental change to the taxation of employment income.

This was a point made by the FTT at Decision [51] when they observed of Abbott v Philbin:

“We do not read that decision as meaning that any deferred payment rights granted or held by employees should be treated as separate from any subsequent payment such that they are taxable on grant or award.”

Against the background of those general observations, we accept of course that the question we must answer is whether the specific contingent rights received by Mr Saunders on receipt of the vested SARs were taxable remuneration.

Before turning to the facts of Abbott, it is helpful briefly to refer to another decision of the House of Lords which features prominently in that case: Tennant v Smith [1892] AC 150. In Tennant the taxpayer was required to reside in part of his employer’s business premises as a condition of employment. The Revenue sought to treat that right (monetarised by reference to the cost of renting alternative accommodation) as a “perquisite,” “profit” or “emolument” of his employment. The House of Lords found for the taxpayer, on the basis that the language in the statute required “something acquired which the acquirer became possessed of and can dispose of to his advantage – in other words money – or that which can be turned to pecuniary account” (Lord Watson at p.160).

In Abbott v Philbin the appellant was the secretary of a company. At its AGM, the company resolved to grant the directors options to acquire shares on such terms as the directors thought proper. On 6^th October 1954, the directors were offered the opportunity to purchase an option to acquire shares at the mid-market price at the date of offer (68s 6d). The purchase price was £1 for every 100 shares. As there was some uncertainty before the FTT as to the terms of the option (Decision, [49]) we have checked them from the House of Lords case papers filed in the appeal. The option agreement provided:

“You will note that the option is not transferable and to the extent not previously exercised will expire on your death or retirement, upon your Service with the Company and/or its subsidiaries ending, or on the tenth anniversary of the date of grant of the Option, whichever first occurs.”

The option, therefore, had to be both acquired and exercised while the option-holder was still an employee. It is also apparent from those papers that when the ability to purchase the option was made known to the directors, they were told “that [tax] counsel had advised that they would be taxed on the value option rights at the date of acquisition, which value was generally estimated at nil, but not on any amount by which the share value at date of exercise exceeded the strike price.”

On 7^th October 1954, Mr Abbott wrote accepting the offer to purchase an option to acquire 2,000 shares for £20. On 28 March 1956, he exercised an option to acquire 250 shares (when the market price was 82s).

The issue arose as to whether the profit made on that exercise fell within rule 1 of Schedule E to the Ninth Schedule to the Income Tax 1952 which taxed “all salaries, fees, wages, perquisites or profits whatsoever” from “an office or employment.” The taxpayer argued that the relevant remuneration was the value of the option when granted. No one argued that the receipt of the Company’s offer of 6^th October was itself a taxable remuneration, and Lord Denning’s judgment explains that such argument would have failed on the basis that the offer was capable of being revoked and was a mere expectation (p.383-84). However, we do not think we can exclude the possibility that someone might have been willing to pay Mr Abbott for the right to decide (a) when he should accept the offer while it remained open and (b) how many options should be exercised. If so, this illustrates the fact that an employee may have something capable of monetarisation, without being in receipt of a legal right of a kind capable of amounting to remuneration.

The majority of the House of Lords held that the relevant taxable remuneration was the value of the option at the date of acquisition, not the profit made on its realisation (it followed that the advice originally given by counsel was correct). It is important to note what each of the three judges making up the majority decided.

Viscount Simonds at p.366 identified the first issue in the case as being whether the grant of the option was “itself a perquisite or profit of the year 1954-55”, saying “it would not, as I understand the argument of counsel for the Crown, be contended that, if the grant of the option was itself a perquisite or profit arising from the office, the subsequent exercise of it would be another perquisite or profit.” He held as follows:

Turning to Lord Reid:

Lord Radcliffe referred to the conflicting arguments as to when a perquisite was received, and the Revenue’s argument of “persuasive force” that it was not when the option was granted (p.376):

There is a powerful dissenting judgment from Lord Denning, but we will not lengthen this decision by summarising it. The ratio of the majority is binding upon us. What is that ratio? Arnold LJ addressed that question in Charman v Revenue and Customs Commissioners [2021] EWCA Civ 1804, [22]:

“Two points were made by the majority of the House of Lords in Abbott v Philbin [1961] AC 352, both of which were subsequently reversed by statute. The first point, and the ratio decidendi of the case, is the one referred to by Lord Walker JSC in Gray’s Timber and by Lord Reed JSC in UBS concerning the time at which the option became taxable … The second point, which was obiter, was that the difference between the price of the shares under the option and their market value when the option was exercised did not arise “from” the taxpayer's employment.”

We gratefully adopt that analysis, but add that the more the realisation of the profit from the options turns on the judgment of the employee, the stronger the case for treating the option itself as remuneration provided by the employer (and vice versa).

We also note the following features of Abbott v Philbin:

As Lord Walker noted in Grays Timber Products Ltd v Revenue and Customs Commissioners [2010] UKSC 4, [5]-[6], the judgment in Abbott caused some difficulties:

“The principle of taxing an employee as soon as he received a right or opportunity which might or might not prove valuable to him, depending on future events, was an uncertain exercise which might turn out to be unfair either to the individual employee or to the public purse. At first the uncertainty was eased by extra-statutory concessions. But Parliament soon recognised that in many cases the only satisfactory solution was to wait and see, and to charge tax on some “chargeable event” (an expression which recurs throughout Part 7) either instead of, or in addition to, a charge on the employee's original acquisition of rights.”

The Abbott decision was reversed by s.25 of the Finance Act 1966. Reflecting the ability of legislation to resolve a problem from multiple perspectives, this provided that the grant of a share option was not taxable as employee remuneration at the date of grant, but the proceeds of realisation were taxable (i.e. resolving the issue of “double taxation”). However, s.78 of the Finance Act 1972 carved out of the scope of s.25 certain socially and economic valuable share options (so-called “restricted securities”) which were not taxable either when the right was received or where it was realised, unless the option was “in the money” for the employee when granted, in which case it was taxable to that extent at that point (s.78(2)). Various amendments were subsequently made, including by ss.135 and 185 of the Income and Corporation Taxes Act 1988 (“ICTA 1988”).

As Lord Walker noted in Grays Timber, [7], the different tax treatment of certain kinds of share option schemes offered ample scope for tax avoidance. In response, the provisions applicable to the taxing of share options was subject to extensive legislation, initially in the form of s.140A to 140C amending ICTA 1988 and thereafter in Part 7 of ITEPA 2003. We will not attempt to summarise those provisions, beyond noting that, as would be expected, they address when options are taxed on grant, on realisation, or on other forms of disposal.

There are two points we would make about the legislative response. The first is that it has involved a complex and iterative process of determining what can be taxed and when, and how to address measures which seek to avoid the imposition of tax or to secure a more preferential tax treatment than is justified. The second is that, to the extent that Abbott v Philbin embodies a binding interpretation of what constitutes an emolument from employment, there has been no statutory intervention which renders that interpretation inapplicable in this case.

We were referred to a number of cases which considered the “ordinary rule” which Abbott v Philbin has been held to establish.

The first was Grays Timber, in which the Supreme Court was concerned with one of the statutory carve-outs from Abbott in relation to employee share options. Lord Walker referred at [5] to “the general principle that employee benefits are taxable as emoluments only if they can be converted into money, but that if convertible they should be taxed when first acquired” (citing Abbott). He continued:

“That case was about share options, which are now dealt with separately in Chapter 5, but it illustrates the general approach that applied in the days when the taxation of employee benefits was very much similar than it is now.”

The next decision is PA Holdings. A company wished to pay annual discretionary bonuses to its directors. Profits were paid into employee trusts, which made awards to employees reflecting their contribution to the company and to the company’s success. In 1999, it adopted a different approach with a view to securing a more favourable tax treatment. A new trust was established with the trustee being empowered to award employees shares in a Jersey SPV, with the employees receiving the dividends due in respect of the shares so allotted. The shares allotted to employees were intended to meet the requirements of restricted shares, so as not to be taxable at the time of transfer.

The FTT and the UT found that the dividends were a profit arising from employment, noting (a) that employees who left the company ceased to be eligible to receive them, and (b) the stated purpose of the scheme as being a means of remunerating employees who received dividends

The issue before the Court of Appeal was whether the dividends were to be regarded as a profit from employment, or simply as the right of the directors as owners of shares allotted to them to the fruits of their ownership. The case did not directly raise the point covered by the ratio of Abbott, but something quite close to it. The immediate receipt – the shares allocated – involved a benefit (albeit a non-taxable one) which was in turn the source of the dividends. The second (and we believe closely related) aspect of Abbott was very much in issue. At [33]-[35], Moses LJ stated:

“No one can doubt but that there are circumstances in which employees may be awarded shares as an incentive or reward and that those employees may subsequently receive dividends or distributions in respect of their shareholding, the source of which may properly be identified as the shares and not their employment. The employees, in such a case, receive those payments in their capacity as shareholder or investor and not as employee. When employees were granted options to acquire shares in their employer and exercised those options, they profited by the increased difference between the option price and the market price when they exercised their options. The profit accrued to the employees as holders of their options and not as employees; it was derived from the option and not from employment (Abbott v Philbin).

But it is not in every case that an employee who is awarded shares and receives dividends can escape the conclusion that the dividends are remuneration and not investment income … How then is the distinction to be made between the receipt of payments in the form of dividends as employee and the receipt of dividends as shareholder? What determines the character of the income in the hands of the recipient? What determines the capacity in which the recipient receives such income? The answer lies not in the administration of some post- Ramsay prophylactic against tax avoidance but in the methods which the courts have long been accustomed to deploy whenever it is necessary to decide whether income is from employment and should thus be charged under Schedule E.

The conventional approach of the courts is to look at all the circumstances of the case in order to answer the one statutory question, namely whether the income receipts of the employee are emoluments or profits from employment.”

At [38]-[39], he noted that answering the question to be answered was “one of substance and not form” and “the court should not be seduced by the form in which the payments … reached the employees. It should focus on the character of the receipt in the hands of the recipients”. He stated that the FTT’s decision that the emoluments were “rewards for services past, present or future” having regard to (i) the fact that the employer funded the purchase of shares with the employees acquiring the shares and dividends at no cost”; (ii) the intention behind the scheme was to motivate employees; and (iii) leavers were eligible, all fully supported the FTT’s conclusion. At [42]-[43] he continued:

“It is that approach which enables a distinction to be drawn between Abbott v Philbin and White v Franklin. In Abbott v Philbin, a realistic appraisal of the facts led to the conclusion that the benefit which arose as a result of the exercise of the option accrued through what Lord Radcliffe (at 369) described as the “judicious exercise” of the holder's option rights. It accrued to him in his capacity as option holder exercising his discretion as to the best time to exercise his rights having regard to the increase in value of the shares, an increase due to what Viscount Simonds described as “the adventitious prosperity of the company in later years” (367) (that it was exercised less than two years after acquisition of the option was neither here nor there).

The facts of this case are miles away from the circumstances in Abbott v Philbin. The payments received by the employees owed nothing to fluctuations or increases in the value of shares in Ellastone and everything to the amount which PA had decided to award as bonuses to its employees. Whilst it is true that the Mourant trustees exercised a discretion in the sense of independently questioning who should be recipients, the quantum of that which the employees received was entirely dictated by the amount PA decided to award as bonuses. The receipts were triggered by PA's decision to continue its policy of making bonus payments and to fund the 1999 Trust and arrived in the hands of employees, as they were intended to do, as bonuses.”

The next decision, UBS AG v Revenue and Customs Commissioners [2016] UKSC 13, was also concerned with an attempt to secure the favourable tax treatment afforded by legislation to certain classes of share option. The employers acquired shares in offshore SPV companies and awarded them to employees in lieu of bonuses. Conditions were attached to the shares to secure the benefits of certain statutory exemptions from income tax. The UBS scheme involved subjecting the shares to a risk of forced sale if the FTSE 100 hit a certain level (there being a 6-12% chance of this happening), which condition had a slight but more than de minimis impact on the value of the shares in the employees’ hands. The condition was only included for tax avoidance purposes, and its potential adverse effect was off-set by call options. The DBGS scheme was similarly constructed. It included a condition that benefits would be forfeit if an employee voluntarily designed or was dismissed for cause (at [52], Lord Reed noted “neither contingency was likely to occur, not least because its occurrence lay largely within the control of the employee”).

The Court concluded that the options did not benefit from the tax exemption, the restrictions imposed having no commercial purpose but having only been included for tax avoidance purposes. However, that left the basis on which the remuneration should be valued:

We would note that this second point was concerned with the valuation of shares, and the statement that they were to be valued by reference to the conditions attaching to them at the date of receipt was, considerations of tax avoidance apart, wholly uncontroversial. While Abbott v Philpin was cited, the issue considered in [94] was not concerned with the issue of “grant of contingent rights v. realisation”.

The final decision was RFC 2012 Plc v Advocate General [2017] UKSC 45. That case was concerned with whether payments made by an employer in return for an employee’s services to an employee benefit trust (at the employee’s direction) rather than to the employee were nonetheless taxable remuneration so far as the employee was concerned. The answer to that question was yes, but in the course of its analysis the Supreme Court considered those circumstances in which payment to a third party would not, at the point of payment, fall to be treated as a remuneration of the employee. At [41], the Supreme Court identified three such exceptions: (i) the taxation of perquisites, at least since the enactment of ITEPA, (ii) where the employer uses the money to give a benefit in kind which is not earnings or emoluments, and (iii) an arrangement by which the employer's payment does not give the intended recipient an immediate vested beneficial interest but only a contingent interest.

When discussing the first exception at [42]-[43], Lord Hodge referred to Tennant and Abbott v Philbin, observing of the latter:

“In Abbott v Philbin [1961] AC 352 a majority of the House of Lords held that an employee of a company was liable to income tax on the grant by his employer of an option to purchase shares in that company in the tax-year in which the option was granted because the option itself had a monetary value which the employee could realise.”

When discussing the third exception at [47] (“where the person entitled to receive the sums paid by the employer does not acquire a vested right in those sums until the occurrence of a contingency”), Lord Hodge referred to Edwards v Roberts (1935) 19 TC 618 in which an employing company entered into an employment contract to give an employee, in addition to his salary, an interest in a “conditional fund”, into which it would make annual payments from its profits, as an incentive for him to advance the company's interests. In that case the employee was entitled to receive the annual income from the fund but had no right to receive any of the capital of the fund other than that which had been held in the fund for five years or more. The taxpayer argued that the relevant remuneration occurred when the employer paid the sums into the fund. That argument was rejected.

We noted that the right to receive was said to arise “at the expiration of five … financial years”. Lord Hanworth concluded that this was “an emolument which accrued and was not payable in each successive year but the sixth year.” The judgment is not wholly clear, however, with Maugham LJ referring to the employee having “a right given to him conditionally”.

There was some debate before us as to whether Edwards v Roberts represented (a) a case in which an employee had a contingent legal right to the amounts in the fund, or (b) a case in which no legal right vested until the employee had completed five years’ service.

Our view is that the latter is correct, for the following reasons:

We would note that Abbott v Philbin has been applied by other courts to share option schemes, and treated as establishing a “general rule” that such options are taxable by reference to their value when granted, from which statute has departed in certain cases. However, none of the cases has had cause to consider the particular type and nature of rights which can bring the Abbott v Philbin approach into play, and whether there are any limitations on them. We also note that PA Holdings stresses the importance of a realistic appraisal of the facts when considering whether the relevant remuneration is the grant of a right or its subsequent realisation.

The FTT began by considering the ratio of Abbott v Philbin, which they found to be that there was only one taxable event, namely the grant itself because “the option was ‘something’ which could be turned into money” ([48]). The FTT then referred the rights in issue in Abbott being different from those in the case before them:

Subject to the issue of whether Abbott v Philbin requires us to reach the contrary conclusion as a matter of authority, we agree with the overall thrust of this reasoning, albeit not every element of it.

We start from the premise that the court is ultimately engaged in the exercise of statutory construction we have outlined at [15] above, in accordance with the principles there set out. We do not believe it would be consistent with those principles to adopt an overly formalistic approach to the determination of whether it was the vesting of the SARs or the receipt of the Payment which constituted Mr Saunders’ earnings. When considering the identification of earnings for the purposes of applying tax legislation, it is necessary to adopt a realistic approach and one which considers substance rather than focussing on mere form. As PA Holdings shows, that is as true of the application of Abbott v Philbin as it is of other aspects of tax law.

The test we have applied, therefore, is to ask ourselves whether, on a realistic appraisal of the facts, and having regard to the substance of the position, Mr Saunders’ earnings were the value of the SARS when granted, or the value of the Payment when received.

We first identify some features of the SARs which were said to distinguish them from the share options in Abbott, but which we have not found of assistance:

Nonetheless, there are material differences between the share options in Abbott and the SARs here, which (in their cumulative effect) lead to the conclusion that, adopting a realistic view of events, Mr Saunders’ taxable remuneration is the amount received by the Payment following a Sale or Liquidity Event, and not whatever amount Mr Saunders might have been able to monetarise the SARs for at the date of grant:

It is convenient at this stage to pick up Mr Firth’s analogy with a lottery ticket given by an employer to an employee by way of remuneration, which he submitted (and the FTT accepted) would fall to be valued at the point of grant, not by reference to the amount won. We agree with that conclusion, but would note the following:

Ultimately, we do not believe that the treatment of this very singular and different right is of assistance in the present case.

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.