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Employee overturns section 222 charge

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13th Aug 2013
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An employee share option scheme that is conditional on employees paying their PAYE liability should not be subject to a charge under section 222, a tax tribunal has ruled.

Benedict Manning – an employee of a UK subsidiary of a Swedish business - exercised an unapproved share option in 2007/08. He notified the employer and paid the option price, and awaited confirmation from his employer regarding the correct amount of PAYE to be reimbursed by him, as set out in the terms of the scheme.

About five months later the employer contacted him to arrange reimbursement of the PAYE, and this was done within a couple of weeks.

However, HMRC argued that Manning had missed the 90 days deadline (section 222 of the IT (Earnings and Pensions) Act 2003) and was therefore liable to a penalty.

As KPMG noted, Section 222 can apply where a payment is made in a ‘notional’ form where it is not possible to deduct PAYE – for example, in a share acquisition. If the employee has not ‘made good’ this amount of tax to his employer within 90 days of the employee will be liable for a further income tax.

The penalty is irrespective of whether the employer has duly accounted for the PAYE to HMRC.

The first-tier tribunal [Benedict Manning and the commissioners for HMRC, TC02666] said that it was not its responsibility to overturn the assessment merely because it appeared penal.

But quoting the Court of Appeal judgment in the earlier case of Chilcott & Anor, the tribunal concluded that if there is a narrower interpretation of the rule, which is more beneficial to the taxpayer, it should be considered.

In Manning’s case, the scheme rules were open to the interpretation that the obligation to satisfy the terms of the exercise was not fulfilled until the PAYE was made good by the employee.

Applying this interpretation meant that the 90 day ‘clock’ did not start until the date on which the employer notified the employee of the amount of PAYE to be made good and on this basis, the 90-day rule had not been breached, so the charge did not arise.

In his ruling, tribunal judge Stephen Oliver QC said that there was “nothing remotely abusive” about the share scheme, which was designed to make sure that every employee exercising an option under the scheme paid all tax due to the company within 30 days.

“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'," Oliver said.

The tribunal ruled in favour of Manning.

Accountants may hope that the ruling will make HMRC more hesitant about pursuing Section 222 liabilities for “non-abusive” tax affairs.

Ernst & Young welcomed the tribunal’s decision. It advised employees to check that share scheme documentation is worded appropriately to minimise the risk of section 222 charges.

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