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HMRC internal manual

Employment Income Manual

PAYE: special types of payment: notional payments: employee’s requirement to make good PAYE: case law

Section 222 ITEPA 2003

Section 222 ITEPA 2003 is concerned only with the tax that the employer is required to account for to HMRC in accordance with Section 710(4) ITEPA 2003 (see EIM11950). If section 222 applies, the amount that is chargeable to tax is employment income of the employee.

Chilcott and others v HMRC

The most significant judicial guidance regarding the application of section 222 has been provided by the Court of Appeal in the case of Chilcott. That case related to events that took place between December 2000 and June 2001. At that time the relevant legislation was found at section 144A ICTA 1988, but there was no substantive change to the legislation when section 144A ICTA 1988 was replaced with effect from 6 April 2003 by section 222 ITEPA 2003. Although section 222(1)(c) was amended with effect from 9 April 2003 to extend the period allowed for the employee to make good the due amount from 30 days to 90 days, the principles established by the Court of Appeal remain valid.

The background to the Chilcott case is that Mr Chilcott and another employee had been granted options to acquire shares in the company that was their employer. Although the point was disputed for some time, the appellants conceded that the legislation dealing with employment-related share options applied to the arrangements. Consequently, in relation to the acquisition of shares by the exercise of the share options, the requirements (now) set out at section 222(1)(a) and (b) were both met. The company as employer was treated as making a notional payment and was required to account for an amount of income tax.

In fact, Mr Chilcott did make a payment equivalent to the amount of tax due so that the requirement at section 222(1)(c) might be met except that his payment was made long after the period allowed, which was then 30 days following the date of the notional payment.

The point at issue, therefore, was whether the charge to tax under (what is now) section 222 should apply.

Mr Yerbury, representing Mr Chilcott, contended that although the words of the legislation appeared plain and unambiguous, at least in Mr Chilcott’s circumstances, the application of the charge to tax was very unfair and might be considered penal.  Consequently, it was not reasonable to apply section 222 in such a situation and that in such a case the section would be being used for a purpose for which it was never intended, leading to an absurd and unjust result.

The Court of Appeal, upholding the decision of both the Special Commissioner and Proudman J in the High Court, confirmed that there was no justification for construing legislation that is clear but may operate in a manner that is perceived to be unfair in a manner that contradicts the clear meaning.  

In that regard, Lloyd LJ said:

“Section 144A is clear and unambiguous in its terms, as Mr Yerbury accepted at the outset of his submissions this morning. It applies to a variety of cases. Some of them have connotations of avoidance. Others however are more to do with the practical difficulties that arise in a number of different types of situation as regards the collection of tax. Share options are in the latter category, because there is no actual cash payment by the employer to the employee. Not only is the provision clear in its meaning and effect, but it is also understandable why there should be such a provision. A different approach might have been adopted to deal with the need for an incentive, to say the least, or encouragement to the employee to make a prompt payment to the employer, but this is the provision that was chosen.”

Lord Neuberger MR added:

“Section 144A of the Taxes Act is, as Mr Yerbury accepts, clear in its terms and has the meaning for which the Revenue contends, as the Special Commissioner and Proudman J held. It is true that its meaning could at least in some circumstances be regarded as penal, as it applies even if “the due amount” is “made good” on the 31st day, but that does not enable this court to rewrite such a clear statutory provision. The fact that some might regard the operation of section 144A, according to its terms, as penal merely emphasises that the court should construe it with care and if there is a narrower construction less beneficial to the Revenue, more beneficial to the taxpayer, available then the court should at least seriously consider it and, if appropriate, adopt it.”

Benedict Manning v HMRC [2013] UKFTT 252

Lord Neuberger’s comments were adopted by the First-tier Tribunal (Tax) in the recent case of Benedict Manning.  Having decided in favour of Mr Manning by reference to the peculiar facts of that case, the Tribunal judge, Sir Stephen Oliver QC, offered the following warning:

“Section 222 was introduced to prevent grossly abusive schemes designed to avoid PAYE tax and NICs.  There was nothing remotely abusive about Tradedoubler Limited’s share option scheme.  It was designed, as we have already observed, to make sure that every employee exercising an option under the scheme made good to Tradedoubler Limited every penny of the PAYE tax due within 30 days.  And yet HMRC conducted their PAYE investigation without apparently troubling to look at the Scheme Rules.  Nor did the assessing officer nor did the officer who conducted the review.  The result is that, unless Mr Manning had appealed, HMRC would have earned a substantial windfall gain at his expense.  We understand that Mr Manning was already heavily out of pocket as the result of his participation in the option scheme and that the assessment has caused worry and stress for him.  We understand also that Mr Manning was not the only employee of Tradedoubler Limited to have suffered the same fate.  When Parliament introduced section 222, they expected it to be properly and carefully exercised.  The section is not, as HMRC sought to argue in this appeal, “mechanistic in effect”. We echo the concerns expressed by Lord Neuberger in Chilcott.”

The Manning case emphasises the need for a careful examination of all the relevant facts.  The contention advanced by HMRC in that case that section 222 is mechanistic in effect refers to the point that the charge to tax under section 222 will apply if all three of the requirements set out at section 222(1) are met.  However, analysis of the facts is not a mechanistic process.  If it is reasonable to construe the relevant facts in a manner that leads to the conclusion that one of the requirements is not met then you should accept that there is not a charge to tax under section 222.