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HMRC internal manual

Employment Income Manual

PAYE: special types of payment: employee’s requirement to make good PAYE: meaning of 'make good'

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.

The legislation specifies that the employee must make good the due amount to the employer but does not define the meaning of ‘make good’.  Consequently, the concept must be construed in a natural sense within its context. The mechanism for making good is a matter to be agreed between the employer and employee.

In the simplest of cases, having received a notional payment in respect of which the employer is required to account for tax to HMRC, within the time allowed, the employee will pay an amount of money (whether by cash, cheque, bank transfer, etc) to the employer equal to the due amount.  This will clearly prevent any charge under section 222. However, section 222 does not say that the due amount must be paid in monetary form.

The requirement for the employee to ‘make good’ the ‘due amount’ to the employer indicates that the employee must provide to the employer something of value.  This envisages that the employee can satisfy the requirement in a non-monetary form. However, because the due amount is calculated as a monetary figure, whatever arrangement is adopted, the value of the item provided must be quantifiable in financial terms and be at least equivalent to the due amount.

For a notional payment treated as made on a date after 5 April 2014, the time allowed is the period ending 90 days after the end of the tax year in which the relevant date falls.

For a notional payment treated as made on a date before 6 April 2014, the time allowed is the period ending 90 days after the relevant date.

In relation to section 222, ‘the relevant date’ ordinarily means the date on which the employer is treated as making the notional payment (see EIM11970).

Ferguson v CIR (SpC 00266)

The case of Ferguson v CIR is sometimes referred to as an example of circumstances in which the employee should be regarded as having ‘made good’. However, there were a number of unusual features in that case and so it provides little assistance.

The appellants, KS, TH & DH Ferguson, were directors of a company that implemented a scheme that was popular in the 1990s as a mechanism for paying remuneration because it was asserted that it avoided liability for employer’s and employee’s Class 1 National Insurance contributions.  Typically, although there was no dispute about there being tax liability, those employers that implemented such schemes also asserted that they were not required to operate PAYE.

In this instance, having heard evidence, the Special Commissioner found in fact that “The Appellants each all along intended that the Company would be put in funds to make the payment of PAYE to the Revenue which they knew required to be made in relation to this form of payment of a bonus.”  However, the Special Commissioner did not make a finding in fact about the basis on which the appellants believed the PAYE applied.

Litigation proceeded initially on the basis that PAYE applied because the scheme arrangements constituted a notional payment, thereby bringing section 144A ICTA 1988 (now section 222 ITEPA 2003) into consideration.  On the basis of the findings in fact concerning the nature of entries made in the company’s books of account, the Special Commissioner held that the appellants had each made good the due amount within the time allowed as required by section 144A(1)(c) such that section 144A did not apply.

The Revenue submitted an appeal to the Court of Session but, before the appeal reached the Court, decisions in the cases of NMB Holdings Ltd v Secretary of State for Social Security and DTE Financial Services Ltd v Wilson (HMIT) (74TC14) established that the arrangements implemented in such schemes should be construed as involving the payment of money. On that basis, section 144A ICTA 1988 would not apply so the Revenue withdrew its appeal.

If the Ferguson case provides any assistance at all, it is only that it is another example, predating the comments of Lord Neuberger in Chilcott and Sir Stephen Oliver QC in the case of Benedict Manning (see EIM11960), of the importance of careful and sympathetic examination of all the relevant facts.