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I hope to be brief so that we can make some progress. The clause changes the deadline by which employees must make good any PAYE amount withheld by their employer on notional payments treated as having been made to them. If the amounts are not paid to the employer by the appropriate deadline, the PAYE paid by the employer is treated as a taxable benefit. This type of notional payment typically arises when an employee receives share-related income—for example, a share option income—that counts as employment income, but where no transfer of money from employer to employee is involved, so the employer has nothing from which to withhold PAYE.
However, a PAYE obligation still exists, so the employer has to pay the amount to HMRC and recover an equivalent amount from the employee. Previously, the deadline for recovering the amount was 90 days from the relevant event, but, from 6 April 2014, the deadline will be 90 days from the end of the tax year in which the relevant event occurs. We do not intend to oppose the clause, but can the Minister explain why the Government did not follow the main recommendation of the Office of Tax Simplification report into employee share schemes that the income in relation to employee share schemes be simply removed from the scope of the legislation with no deadline? Does the Government agree with the OTS recommendation that improvements should be made to the HMRC guidance to clarify what arrangements need to be in place to constitute making good? Have the Government given any consideration to extend the definition of “making good” the tax to include the arrangements where an undertaking or indemnity has been given within the period to make good the tax?
It has been noted and recognised by the OTS that the Government proposals would give employers who need to recoup PAYE from employees early in the tax year much longer to do so than those who need to do so at the end of the process. It would be helpful if the Minister could respond to those points and comment on whether the proposals create an uneven playing field.
Clause 19 concerns the rules around notional payments of employment income, such as payments that are not in cash, where it is not possible for employers to deduct PAYE in the same way as they would for cash payments. This is just one of the provisions that implements recommendations made by the Office of Tax Simplification to simplify the tax rules. I will be setting out many further simplifications arising from OTS recommendations as our consideration of the Bill proceeds.
Currently, where an employer is treated as making a notional payment to an employee, such as on the exercise of a share option by the employee, and that employer is required under PAYE to pay an amount of tax that they could not deduct from the notional payment, the employee is required to make good that amount to the employer within a specified period. Otherwise, an income tax charge will be due on the amount that has been paid on the employee’s behalf. This reflects the fact that the employee has received a benefit, because their employer has met the tax liability on their employment income. I mentioned the term “making good”, as did the hon. Lady. There is no statutory definition of “making good”. The normal meaning applies. For example, the employee should transfer something of value to the employer.
The tax charge is often described as unfair. It is intended, however, to ensure that employees fund their own tax and national insurance contributions liabilities, regardless of whether they are paid in cash or in other ways. It addresses cases in which non-cash payments have been used to avoid tax and puts an employee receiving a notional payment in broadly the same position as their colleagues who receive their salaries net of the deduction of PAYE tax. The change we are making will make it easier for businesses to comply.
The deadline for the employee to make good the amount will be changed from 90 days after the event treated as the notional payment to 90 days after the end of the tax year in which the event fell, which will be 6 July following the relevant tax year. On the question of why the Government have not precisely implemented the OTS recommendation, we have applied the change to all notional payments, not just those arising from employee shares. The OTS proposed treating some notional payments, such as employee shares, differently from others, but we want to apply a degree of consistency. The Government also decided to change the NICs treatment of this tax charge.
We believe that these modifications will better control the Exchequer cost and ensure consistent treatment for all notional payments while still retaining the simplification benefits of the OTS proposal. This change simplifies the position for businesses: there is now one single deadline for each tax year by which an amount must be made good following a notional payment to prevent a further tax charge. The single deadline is aligned with that by which the employers must submit information to HMRC on employee expenses and benefits, and so will provide a focal point that incentivises businesses to review the circumstances of any notional payments made during the previous tax year.
In most cases, this change will give a longer period for the employee to make good the relevant amount than previously and we anticipate that it will lead to fewer cases in which the deadline is missed simply because of an oversight. I hope that the clause may stand part of the Bill.