HMRC has recently publicly confirmed that if an employee has given an indemnity for PAYE tax on shares, this stops a further tax charge arising on any underpaid PAYE.

Underpaid PAYE on shares can arise in a number of cases. The value of shares may have been incorrected estimated or a share plan or EMI arrangement may not in fact have qualified for the relief from income tax which was given to employees. Sometimes operating PAYE is simply overlooked.

If PAYE has not been operated properly on shares, the problem is that it is not just a question of worrying about the underpaid tax (as is the case with cash payment). With shares, a further tax charge arises if the employee has not “made good” that PAYE to his employer within sufficient time. Essentially, the amount of underpaid PAYE is itself taxable and subject to employers’ NICs, and so there is tax on tax.

So what is “making good”? The employee paying his employer the amount of PAYE or directing sufficient sale proceeds are directed to the employer would obviously count, but where underpayment comes up some time after the relevant event, that may be too late. For some time though advisers have been able to agree with HMRC that an employee giving an indemnity is also making good, although this was was not well-known in the beginning. After a long delay, HMRC has now published guidance making these views public and confirming that so long as an employee gave an indemnity for tax in the relevant share plan or sale/acquisition agreement, the further liability should not arise as a general matter. HMRC understandably reserves the right to ignore an indemnity where there is no evidence that the indemnity was intended to be operated.

Indemnities are virtually always present in relevant documentation, whether in share plans, SPAs or individual arrangements. HMRC’s announcement therefore means that this further charge, which has raised its head for many years whenever there is underpaid PAYE on employee shares as something that HMRC might insist on, should not now arise in the vast majority of cases.

Click here to see the new HMRC guidance, which was published on 8 December 2016.