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HMRC internal manual

Employment Income Manual

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

Section 222 ITEPA 2003

Avoidance Schemes

Where an employer implements and an employee participates in a scheme for the avoidance of employment taxes, the employer may include an indemnity clause (see EIM11966) which states that the employee will be responsible for any taxes arising if the scheme is established to be ineffective.  Such arrangements should not be construed as satisfying the requirement for the employee to make good for the purposes of section 222. The indemnity agreement may be in existence at the relevant date but it will be contingent on the effectiveness of the avoidance scheme. Even if the value of such an agreement is measurable in financial terms, at the time the agreement is given, the value will be significantly less than the due amount.

Not a bona fide contractual liability

Similarly, the indemnity agreement will not be effective if, on careful examination of all the relevant facts, the terms may be construed as a form of window-dressing. If there is evidence that the employer routinely fails to invoke the indemnity agreement, or chooses not to in relation to particular employees, it is likely that the true value of the indemnity agreement will be less than the due amount and the employee will be subject to a charge under section 222 unless the requirement to make good is met in another way.