Tribunal allows taxpayer's appeal in share options case and criticises HMRC's 'mechanistic' approach to statutory interpretation

14 June 2013

The First-tier Tribunal ('FTT') has allowed the taxpayer's appeal in Bennedict Manning v HMRC.[1]

The taxpayer was appealing a charge under section 222 Income Tax (Earnings and Pensions) Act 2003 ('ITEPA'). All statutory references below are to ITEPA.


Mr Manning was employed by Tradedoubler Limited ('T'), which established a share option scheme for its employees. The scheme rules provided that a condition for a participant's exercise of an option was that he should deliver cash or a cheque to T sufficient to pay the PAYE tax due. Each participant had to ensure that cleared funds were provided to T within 30 days of exercise of an option (or an earlier date if certain conditions were satisfied). T would determine whether PAYE was due to be accounted for and, if so, the amount due on exercise. Any such determination would be final and binding on participants.

On 28 October 2007 Mr Manning notified T of the exercise of his option over 7998 shares, for which he made payment to T. The FTT assumed (in the absence of evidence on the point) that T had, in its November 2007 return, accounted to HMRC for PAYE and NICs in relation to the gain on exercise of the option. T did not notify Mr Manning of its final PAYE determination as required by the scheme rules.

On 28 March 2008, T informed Mr Manning that he appeared not to have paid the outstanding debt for his tax and NICs relating to the 2007 option exercise. Mr Manning advised T that this was the first communication he had received on the subject, and that he did not know how much he owed T or how to make payment. T apologised and provided Mr Manning with a calculation of the gain per option and the tax and NICs payable. On 11 April 2008 Mr Manning paid T an amount equal to the PAYE tax payable in relation to the exercise.

HMRC carried out an audit of T's PAYE compliance and concluded that, as the 'relevant date' was 28 October 2007, T had paid the amount due more than 90 days later. Accordingly, HMRC assessed Mr Manning to income tax on the relevant tax accounted for by T under PAYE on the grounds that he had failed to make good the tax to his employer within 90 days following 28 October 2007.

Mr Manning appealed against the assessment.

Relevant legislation

Section 222 provides that if (a) an employer is treated by virtue of section 700 as having made a payment of income of an employee ('the notional payment'); (b) the employer is required by virtue of section 710(4) to account to HMRC for an amount of income tax ('the due amount') in relation to the notional payment; and (c) the employee does not, before the end of 90 days from 'the relevant date' (i.e. the date on which the employer is treated as making the notional payment) make good the due amount to the employer, then the due amount is to be treated as earnings from the employment for the tax year in which the relevant date falls.

Section 710 provides that where an employer makes a notional payment of PAYE income of an employee, the employer must deduct income tax at the relevant time from any payment(s) that the employer actually makes of, or on account of, PAYE income of the employee. Where there is a notional PAYE payment no money passes from employer to employee and so there cannot be a deduction of tax, as would be the case with an actual payment. The employer must deduct tax in relation to the payment ('the due amount') and pay it to HMRC.

The parties' contentions

Mr Manning contended that, as the assessment produced a penal result, HMRC should have exercised their discretion in the interests of fairness and even-handedness. HMRC contended that the facts of the case were clear and that the application of section 222 was 'mechanistic in nature', with the result that the charge was lawfully due.

The FTT's decision

The FTT drew support from Lord Neuberger MR's judgment in the Chilcott case.2 While section 222 can, in some circumstances, be considered penal, this does not enable the rewriting of section 222, nor does the FTT have authority to carry out a judicial review of how HMRC have exercised their assessment powers. However, the fact that section 222 can be penal emphasises that this section should be construed with care and, if it is available to the taxpayer, a narrower construction that is more beneficial to the taxpayer than the Revenue should be adopted.

Section 222 is also a charging section in that it charges to tax notional amounts that would otherwise have no place in the taxing system. The tribunal needs therefore to be satisfied that the words of charge fairly cover the circumstances of the case. According to the scheme rules, exercise of the options was 'conditional' i.e. the relevant shares did not become the employee's until he had satisfied the condition of delivering cash or a cheque sufficient to pay relevant PAYE within 30 days. T also only became obliged to issue the relevant shares on delivery of such payment within 30 days. Accordingly, the employee did not acquire a beneficial interest in relevant shares until he had made good the full amount of PAYE tax due. Mr Manning had not satisfied this condition.

The 'relevant date' is 'the date on which the employer is treated as having made the notional payment'.3 The date of notional payment is the date of 'acquisition of securities pursuant to the … option'4 i.e. 'the time when a beneficial interest is acquired'.5 Beneficial ownership of the relevant shares was 'held in suspense' until Mr Manning paid the PAYE tax due within 30 days of exercising the options. His failure to pay within that period – which in turn was caused by T's failure to notify its final determination – meant his right had lapsed and T ceased to be under any obligation to vest ownership of the shares in him. Accordingly, 28 October 2007 could not be the relevant date. T had provided Mr Manning with its calculations on 28 March 2008 and he had paid the amount due to T by 11 April 2008 (i.e. within 90 days of exercise of the option).

The FTT rejected HMRC's argument that section 222 was 'mechanistic in effect', and allowed Mr Manning's appeal.


It would appear that the FTT had some sympathy for Mr Manning who, through no apparent fault of his own, was faced with a tax on a tax in circumstances where there had been a significant fall in the value of the shares he had acquired pursuant to his option. The FTT was also influenced by the fact that there was 'nothing remotely abusive' about T's share option scheme which was designed to make sure that every employee exercising an option under the scheme made good the PAYE due within 30 days. The FTT criticised the fact that HMRC did not appear to have troubled to look at the scheme rules and would have earned a substantial windfall if Mr Manning had not appealed the assessment.

The FTT's reasoning must apply equally to a 'less worthy' taxpayer as long as there is a condition precedent to the exercise of a share option that the employer should make a final and binding determination whether PAYE is due to be accounted for and, if so, what is the amount due on exercise. If the FTT's decision is correct, it will be relatively easy to frame scheme rules in such a way as to avoid the 'penal charge' contained in section 222.

HMRC can be expected to seek to appeal this decision to the Upper Tribunal as it goes against their longstanding view that section 222 applies where the employer does not apply PAYE correctly.6

1 [2013] UKFTT 252 (TC) (Sir Stephen Oliver and Mark Buffery).

2 Chilcott v HMRC [2011] SCC 456.

3 See section 224(4)(b).

4 See sections 222(1)(a), 472(1), 477(3)(a) and 700.

5 See section 477(4).

6 See Employment Income Manual EIM11951.