Case confirms the “tax on tax” charge applies automatically if employee fails to “make good” the employer, we look at the implications.

In Chilcott, Griffiths and Evolution Group Services Ltd v Revenue & Customs Commissioners, two directors exercised options - the employer did not operate PAYE, wrongly thinking it was not required to do so.

The amount assessed to income tax on exercise was £827,743 (which the directors paid through self-assessment). The employer should have paid this through PAYE and sought reimbursement from the directors.

Section 222 ITEPA 2003 imposes a charge on the employee if he does not “make good” the tax payable through PAYE within 90 days of the option exercise. Under s222 the amount not made good is treated as an additional benefit which is subject to income tax through self-assessment. It applies even if the tax is subsequently paid and even if the employee makes good the employer after the 90 day period.

HMRC duly imposed a charge of £331,097 under s222 (being 40% of the original tax payable). The directors argued s 222 does not apply in these circumstances as it is an anti-avoidance measure and / or there is a double charge to tax. These arguments were rejected; s222 is intended to be a surcharge for late reimbursement.


This case is no surprise as the wording of s222 is clear. It means that where PAYE is due, employers not only have to ensure they operate PAYE but also that they obtain reimbursement from employees within 90 days.

Well drafted plan rules should enable employers to sell sufficient shares and to use the proceeds to pay the PAYE or require the participants to make arrangements to satisfy the PAYE liability as a condition of receiving shares subject to the award (such as paying a cheque to the employer to enable them to pay the PAYE due).

It is not always clear when PAYE has to be operated. PAYE applies where shares are "readily convertible assets". Where shares are traded on a stock exchange or where a private company is about to be sold for consideration which includes a cash element, it will be clear that shares are readily convertible assets.

Where shares are in a subsidiary and the company is not controlled by a company listed on a recognised stock exchange (such as a subsidiary of an AIM traded company), the shares are deemed to be readily convertible assets even if there is no market for the shares. In these circumstances an employer might no realise PAYE is due (for perfectly understandable reasons) and would not therefore require participants to make good the tax. Participants in employee share plans may be visited with a s222 charge in these circumstances through no fault of their own.