In the latest round of the UK’s most prominent tax grudge match, the Reed Group lost a first tier tribunal appeal against HMRC’s decision to revoke an expenses dispensation for its temps after eight years. Faced with a potential tax bill of £158m, the company has called for a judicial review of its treatment by the tax department.
The multi-year, multi-strand appeal rests on fundamental questions about the employment status of the company’s temporary workers, whether it was entitled to a dispensation for their expenses and the nature of the salary sacrifice scheme under which it repaid the staff a portion of the tax saved.
The tribunal heard that as many as 500,000 workers participated in the Reed travel allowance schemes during 1998-2006 . The overall amount of HMRC’s assessment, including interest, is in the region of £158m. Reed is unlikely to recover anything if it loses its appeals.
Having decided to make temps on its books employees within several of its staffing agency subsidiaries in 1998, Reed’s operations director Derek Beal, a chartered accountant, was advised by Robson Rhodes that it might be able to take advantage of a relaxation in the rules on travel and subsistence expenses to allow them to participate in a salary sacrifice scheme.
If they opted to join the Reed travel allowance scheme, employees would receive a lower level of gross pay, but would gain through a tax-free scale payment based on where they worked and how they got there. The arrangement also saved Reed considerable sums in income tax and NICs.
HMRC officials grew increasingly wary of Reed’s arrangement, the amounts being paid out and the employment status of recipients and revoked the fourth version of dispensation in April 2006. Before the tribunal, HMRC’s barristers argued that the travel allowances were not paid out for deductible expenses, but were in fact part of the employed temps’ salary. In the view of HMRC officials, the company’s temp workers did enjoy continuity between assignments, but were only employed for the duration of each assignment. Since they amounted to permanent workplaces for the duration of the engagement, ordinary commuting costs were not deductible.
On the basis of the substantial evidence presented, the judges highlighted the following key issues:
- Did the employed temps make an effective salary sacrifice?
No. “Far from providing a benefit to the employed temp, [Reed] appropriated a significant part of the saving to itself; and the supposed sacrifice, however it was presented, was no more than an arithmetical adjustment whose purpose was to ensure that Reed secured the intended share of the benefit. It was not, in our view, a sacrifice in the true sense of that word.”
- Were the disputed allowances within Chapter 1 or Chapter 3
A score draw. The judgment on this point favoured Reed’s interpretation that the allowances were Class 3 emoluments that could be covered by a dispensation, but this was secondary to the workers’ employement status. If their workplaces were permanent, the allowances would be taxable as earnings under Chapter 1.
- Were the workplaces temporary or permanent?
Reed did have a contract of employment with its temporary agency staff, but this did not satisfy the judges that it extended to the periods after particular assignments had ended. In their view, Reed’s obligation was to try and find opportunities to work, which temps could decline. Reed exercised no control over the temps when they were not on assignment and the contracts lacked provisions that would merit them being accepted as contracts of service. “While we accept that there was a contract of some sort when the employed temp was not on an assignment, it was not a contract of employment,” they concluded.
- Did the dispensations cover the allowances?
“The short answer to this question is ‘no’ since, as we have determined, the allowances fell within Chapter 1 and could therefore never be covered by a dispensation.”
The tribunal is clear enough on the employment status and tax determination, but the case has already been the focus a request from Reed for a judicial review of HMRC’s decision to revoke the dispensations retrospectively without uncovering any material misrepresentations (despite the evasiveness noted by the first-tier judges, Reed was not found to have misrepresented the nature of its travel scheme to HMRC). The tax department's actions breached Reed's legitimate expectation that it could proceed with the scheme based on HMRC's dispensation. In November 2010 an upper tier tribunal decided that the judicial review should be stayed until after the first tier tribunal came to a decision about the tax appeals. Much of this ground is summarised in the first-tier tribunal decision, but will be revisited when the judicial review gets under way.
Following the first-tier tribunl decision, Reed issued a statement expressing disappointment with the tribunal decision.