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Published on 3 April 2023

Loan charge and section 222 charges


For some people affected by the loan charge, the law says that a further tax charge is due as well as the loan charge itself. HMRC have recently explained that in certain circumstances they won’t seek to collect this further tax charge. However, you may still receive correspondence from HMRC about it. In this article we explain what this additional tax charge is, what HMRC’s position is and what to do with any correspondence you may receive.

Under legislation (section 222 ITEPA 2003), a further charge (‘tax on tax’) applies to some people who have to pay the loan charge if certain conditions are met. These conditions can only be met where an employer was required to operate PAYE on the loan charge income, so will not be met for most people who have to pay the loan charge. However, you should still be aware of when this further charge can arise.

HMRC have recently updated their guidance to reflect a decision they have made about section 222 (s222) charges where they arise on the loan charge – see GOV.UK here.

This is an extremely complex topic which may require professional assistance, however in this article we try and explain more.

NEWS: Loan charge and section 222 charges. image of 2 people holding a piece of paper between them that says 'loan approved'

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What’s HMRC’s decision?

HMRC have recently confirmed to us that their Commissioners have used their ‘Collection and Management’ powers to decide that they will not collect s222 charge liabilities which arise on the loan charge in certain circumstances.

The decision will apply to individuals that are settling with HMRC and who – broadly - qualify for the Commissioner’s decision on ‘residual tax’ and have a legal route to prevent any s222 charge arising. The actual agreed criteria are:

  • the loan charge has been paid or included within the settlement (same as residual tax)
  • the average annual income provided to the individual through a disguised remuneration scheme is £75,000 or less in each tax year (same as residual tax)
  • no litigation has been started before a court or tribunal in relation to the residual tax or loan charge (same as residual tax)
  • the loan charge arises on an amount subject to an earlier income tax liability and that earlier liability did not also give rise to a section 222 charge.

You have to meet all of the bullet points to qualify for the Commissioner’s decision.

Where individuals do not qualify for the decision because they do not meet one or more of the first three conditions in the bullet points above, they may still have a legal route to prevent the s222 charge arising on the loan charge depending on how they resolve their affairs with HMRC (final condition). It is therefore possible they may not have to pay the s222 charge despite not qualifying for the Commissioner’s decision.

Although HMRC can’t give tax advice to individuals, they should make them aware of all of the options available to them when settling. We would recommend that individuals ask HMRC about their options when settling and then seek independent professional advice as to which option is most beneficial.  

⚠️ Warning - Even if you do not have to pay the s222 charge because of this decision, or for another reason, you may still receive correspondence from HMRC about it.

A s222 charge can only arise on amounts subject to the loan charge that an employer should have operated PAYE on. Where PAYE should have been operated, HMRC have committed to trying to collect the loan charge liabilities from the employer in the first instance. However, where a s222 charge applies this will need to be paid by the individual and not the employer.

We expect HMRC to be sending out Regulation 80 determinations for the loan charge to employers shortly. As part of this exercise, they are also sending out discovery assessments to individuals which will include the underlying loan charge tax liability (in case they can’t collect it from the employer) and the s222 charge, where it applies.

This is because where HMRC expect liabilities to be legally due, they need to include them in discovery assessments to protect their statutory ability to collect the tax that is due. This is the case even if the taxpayer can ultimately avoid the s222 charge or decides to settle and qualifies for the Commissioner’s decision explained above.

HMRC will only be able to determine if an individual has to pay the s222 charge as part of the settlement process. If an individual settles with HMRC and the s222 charge isn’t due, the amount assessed by the discovery assessment can be reduced, including to nil, if the assessment is under appeal and not final.

If you receive a discovery assessment for the s222 charge, it is also worth reading our earlier article on loan charge discovery assessments to help you identify if there is scope for arguing the assessment isn’t valid and or/the amount is overstated. 

What’s the background?

Some people received loans, rather than normal taxable income, in a previous employment. If the loans were not repaid, nor settlement reached with HMRC by the relevant deadline, these outstanding loans are subject to a tax charge called the loan charge where certain conditions are met. The loans are added together and treated as employment income arising as at 5 April 2019.

This means that where there was an employer who was onshore (in the UK) and still in existence at 5 April 2019, HMRC would have expected them (the employer) to report the outstanding loans on a Real Time Information submission and account for the loan charge via PAYE. This would have been due to be paid to HMRC by 22 April 2019.

To fulfil their obligations, an employer (or ex-employer) should have put a notional amount of income equivalent to the outstanding loans through the payroll to generate the PAYE amount. As there was not any actual income to deduct the PAYE from (and/or no other ordinary salary, ‘actual payments’, to make the deduction from in the same pay period), an employer would have had to pay the amount due to HMRC out of their own funds.

Where this happens, unless the employee makes good or reimburses the amount of tax that the employer was required to pay to HMRC within a certain timeframe (which has now passed), there is an employee tax charge under s222 ITEPA on the tax payable by the employer which they were unable to deduct from the employee. This charge still applies even if the employer does not actually pay the tax to HMRC.

In HMRC’s Disguised Remuneration Issue Brief, this is covered at ‘What happens now - 8. Employers who were required to operate PAYE on loan charge amounts – Further tax charge on amounts not made good’.

If payment of the tax to HMRC was not made on time or at all by the employer, late payment interest will be due. 

What, exactly, is a section 222 charge?

The s222 charge is basically a tax charge on the PAYE tax the employer was unable to deduct, but is required to pay to HMRC, as explained above. This rationale for the charge in typical contexts, is that the employee has had the benefit of receiving their income gross, without the deduction of tax by their employer.

For a s222 charge to arise under the legislation, the following conditions need to be met:

  • The employer is treated as having made a notional payment of income of an employee (the loan charge is always a notional payment where PAYE should have been operated);
  • The employer was required to account for an amount of PAYE tax which they were unable to deduct in respect of the notional payment; and 
  • The employee does not ‘make good’ (reimburse) the amount that the employer is required to account for to HMRC within 90 days of the end of the tax year the payment was made in. (by 4 July 2019 for the 18/19 tax year in which the loan charge arises) 

What’s the problem with a s222 charge?

In some cases – not much. Many individuals would prefer to have their employer (or ex-employer) pay the loan charge, and only suffer the s222 charge. But some employers that were in existence in April 2019 and who were onshore (in the UK), will not have paid the loan charge via PAYE. This means that the PAYE amount (plus late payment interest) is outstanding. We understand that HMRC are likely to seek to collect it from them soon, by issuing Regulation 80 determinations.

Whilst HMRC will actively pursue collection from an employer in the first instance, if they are unable to collect the amount from them, HMRC may use their powers to effectively transfer the requirement to pay the loan charge and interest to the individual.

In this scenario, even though the individual will end up paying all the loan charge tax themselves, they will also incur a s222 charge – effectively paying both the loan charge tax and the further tax charge under s222. This is because the wording of the legislation hinges on what the employer was liable ‘to account’ for - even if it wasn’t ever paid over by them to HMRC.

The same situation applies if an employer eventually pays the loan charge (for example, in response to the Regulation 80 determination) but then recovers the tax paid from an employee. Because the employee did not make good the amount by 4 July 2019 (even though it is now impossible to meet this deadline), the s222 charge is already due.

HMRC’s position on s222, which is likely correct on the basis of a strict reading of the legislation but is perceived by many, as unfair, is set out on GOV.UK.

To be clear, the s222 charge will not apply where the individual reimbursed the employer for the full PAYE liability by 4 July 2019. As a s222 charge is an all or nothing charge, partial reimbursement does not prevent the s222 from arising. 

Is this fair?

Section 222 was passed by Parliament, but we think it unlikely that anyone envisaged this particular situation which levies the charge in instance where an employee, rather than the employer, ends up paying the loan charge. In the past we and other tax professionals have said that HMRC should consider whether it is appropriate to impose an s222 charge in these circumstances and/or how best to alleviate the effects of the charge. 

Is it possible to avoid a s222 charge?

Yes, it is possible to avoid a s222 charge even if it appears to apply to an individual. First of all, HMRC say that a s222 charge may not arise if there is a legally enforceable obligation on the part of the trustee to indemnify the employer for the tax owing. See section 3.4 in their guidance.

There may also be an argument that an indemnity clause that requires the employee to indemnify the employer for the tax owing, may be grounds to challenge a s222 charge. Check any scheme documentation that you have for wording to this effect and seek further advice.

There is also a more difficult and technical way where there is an underlying tax dispute to be settled (where any earlier tax charges under consideration do not trigger a s222 charge). In very basic terms, individuals are likely to have more than one tax charge on the loans that they received, one in the year the loan arrangements were in place and the loan charge itself. Legislation ensures that double taxation relief is given to offset the charge paid against the other outstanding charge.

Where an individual is settling and decides to pay the ‘earlier’ tax charge as part of that process, the amount paid will be treated as payment on account of the loan charge. As well as reducing the amount of the loan charge payable, this can also effectively remove the s222 charge on the loan charge where the earlier tax charge is paid in full.

This means it may be possible for a route to be taken by a taxpayer, while reaching a settlement with HMRC about any open enquiries/assessments, which avoids a s222 charge where it would otherwise arise on the loan charge. However, this will be fact dependent and is likely to require quite a lot of thought and work on both HMRC’s and the taxpayers’ part.

However if an individual takes this option, they cannot qualify for the residual tax concession that HMRC announced in 2020, because the loan charge, not the ‘earlier’ tax charge, must be paid to qualify for it. The residual tax concession set out that HMRC, in certain circumstances, can forgo any ‘residual tax’. Residual tax is any amount of Income Tax, NICs or late payment interest owing from underlying (earlier) tax disputes, over and above the amount of loan charge paid. By applying the residual tax concession it means the amount of earlier tax charges will be reduced and that HMRC will close any open enquiries/assessments where there is nothing further for the individual to pay.

To spare HMRC and taxpayers the complex process required to avoid a s222 charge, and in light of the issue around settlements where the residual tax concession can be applied - as explained above - HMRC have recently confirmed to us that their Commissioners have used their ‘Collection and Management’ powers to decide that HMRC will not collect s222 liabilities which arise on the loan charge in certain circumstances.

Is there anything else I should know?

There is an issue with late payment interest building up, that individuals affected by this issue also need to understand.

As explained above, the loan charge was due to be paid to HMRC by employers who were still in existence and who were onshore (in the UK), by 22 April 2019. If this was not the case, then the loan charge would have been payable by the individual.

If this was not done, late payment interest will be building up on the amount. Historically, late payment interest has been quite low, however, it has recently started to rise and currently sits at 6.5% per annum, meaning that late payment interest is now a significant consideration.

Where someone believes their employer, upon receipt of the Regulation 80 determination from HMRC, will not pay what is owed, they may wish to consider making a payment on account of the amount owed to HMRC. This would have the effect of stopping interesting building up on the amount in the event that it was then transferred to them.

Again, this is complex and advice should be taken. Making a payment on account does not mean that you agree to pay the loan charge or have to go on to settle your position with HMRC. For example, if a payment on account is made, and then the employer pays, the payment on account can be refunded to you.

Final thought

This is an extremely complex topic. If you receive a discovery assessment which includes a s222 charge and aren’t sure what to do next, we set out where to find professional help (which may not be as expensive as you think or may even be free from TaxAid), in our earlier article.

You can read more about TaxAid in our general guidance on where to find help with a tax problem.

If you are a limited company, and are effectively the employer and the employee, such that the economic burden is fully borne by you one way or the other, we strongly recommend you take professional advice as to your options. For instance, if you settled from the corporate perspective - this means subject to certain rules, you would get corporation tax relief for the settlement but would not be able to use the Commissioner’s decision to avoid the s222 charge. If you settled from the individual perspective, you would not get corporation tax relief but could potentially avoid the s222 charge.

There may be a number of other factors at play - only a professional adviser will be able to help you work out which is the best action for you - given all of your individual facts and circumstances.

You should also take professional advice if HMRC write to you about a s222 charge but you think that your former employer ceased to exist prior to 5 April 2019 or was not based onshore (in the UK). In such cases, there could not have been an obligation for that former employer to account for the loan charge and thus there should be no s222 charge.

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