On 8 December 2016, HMRC published updated guidance on section 222 of the Income Tax (Earnings and Pensions) Act 2003 (“ITEPA”).
Under ITEPA, PAYE must be operated by an employer on certain “notional payments”. As such notional payments do not involve the actual transfer of money between employer and employee it is often the case that the full amount of tax due cannot be deducted from (other) actual payments made to the employee in the same period.
Section 222 of ITEPA provides that the tax accounted for (ie not deducted) by the employer on a “notional payment” is itself chargeable to tax as employment income unless the relevant amount of income tax is “made good” by the employee within 90 days after the end of the tax year in which the “relevant date” falls.
The updated HMRC guidance includes HMRC’s view on the meaning of “making good” the income tax due. In particular the updated guidance confirms that a payment by the employee does not need to be in monetary form (although it does need to constitute something of value, quantifiable in financial terms and at least equivalent to the tax due).
Referring specifically to “bona fide commercial non-monetary reward arrangements”, such as employee share schemes, the updated guidance recognises that it is common for employees to be obliged to indemnify the employer for any taxes that become due. HMRC states that “in most cases” such an indemnity will prevent a section 222 charge from arising, but that the arrangements (however structured) must create a bona fide contractual liability for the employer to be reimbursed by, or otherwise recover from, the employee an amount equal to the tax due.
The updated guidance also helpfully states that the mere fact that, as an exceptional circumstance, the employer fails to recover the tax from the employee will not result in a section 222 charge arising, provided it can be shown that the “indemnity” is usually acted upon.
The updated guidance can be viewed here.