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Umbrella Company faces £11m bill for underpaid tax

22nd Jun 2022
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As a highly-respected sub-contractor and intermediary in the contractual chain, The Guild...
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A recent decision by a First Tier Tax Tribunal found that Exchequer Solutions Ltd (ESL), an umbrella company, could owe a potential tax liability of £11M because it was found by the tribunal that it had not engaged its workers under an overarching or umbrella contract of employment, therefore meaning that travelling expenses paid to its workers when travelling from home to site were incorrectly treated as tax-free.

Traditionally, a typical umbrella company model involved paying the worker a wage consisting of the national minimum wage together with rolled-up holiday pay and as much ‘tax-free’ expenses as possible, before adding, in the form of a bonus, any additional pay left over following the calculation.

Clearly this arrangement had the effect of increasing the worker’s ‘take-home’ pay significantly, as there was no deduction of tax or National Insurance Contributions (NIC) from the expenses element of the payment, since it was considered that the travel expenses were for attendance at a temporary workplace.

The key issue in this appeal at the Tribunal centres on the following:

  • Does ESL employ the workers on a continuous basis under an overarching or umbrella contract of employment which covers all the various assignments undertaken by a particular employee through ESL, including any gaps between those assignments and those periods where the individual may be working for another employer; or
  • Is there a series of separate contracts of employment for each individual assignment.

Where there is an overarching (or umbrella) contract of employment, each place of work is considered to be a temporary workplace, meaning that expenses incurred in travelling to those workplaces can be paid tax-free. Conversely, if it is considered that each engagement is a separate employment contract for each assignment, then each workplace is a permanent workplace and any payment in respect of home-to-work travel expenses remains liable to tax and NIC.

HMRC’s view was that during the relevant tax years 2013-14 to 2016-17 inclusive there was no overarching contract of employment, so the payments relating to expenses were subject to income tax and NIC under the PAYE system.

In response, ESL argued that the arrangements in place contractually supported the position of an overarching or umbrella contract and that the Regulation 80 determinations and NIC decisions totalling £11m should be dismissed.

In addition to the stance taken by ESL in respect of the overarching contract arguments, ESL also challenged:

  • The validity of the wording used by HMRC in its regulation 80 determinations;
  • Whether ESL were entitled to use the benchmark scale rates without a dispensation from HMRC;
  • Whether, for the purposes of s339A ITEPA, ESL had the right of supervision, direction or control (SDC) over the manner in which its employees provided their services during the 2016-17 tax year; and
  • Whether the reimbursements of travelling and subsistence expenses incurred by employees of ESL in attending a permanent place of work comprise “earnings” for the purposes of s3 SS(CB)A.

Detailed arguments from both parties concerning whether mutuality of obligation had been met, creating a single contract for each worker regardless of their assignment and location of work, were considered by Tribunal Judge Robin Vos who was clearly not satisfied that, under the contract between ESL and the relevant individuals, there was insufficient mutuality of obligation to mean that the contract was one of employment. 

Crucially, it was found that ESL had no ongoing obligation to provide work or benefits and the individuals had no obligation to carry out any work for ESL.

The contract in existence between ESL and the relevant individuals did not, on a continuing basis, satisfy the minimum requirements for a contract of employment. In the words of the Judge, “there is no mutuality of obligation and no sufficient element of control. The contract, such as it is, is not therefore a contract of employment. Instead, a separate contract of employment arises each time an individual identifies an assignment and ESL agrees to act as the employer in relation to that assignment.”

The Judge went on to say, “On this basis, one of the prerequisites for an ongoing contract of employment is missing and so, irrespective of any control ESL may have had over the individuals in the periods between assignments and any other relevant factors, the contract cannot be a contract of employment.”

The result of this ruling is that the travel and subsistence expenses in question in each case relate to a permanent workplace and not a temporary workplace and are not therefore deductible or allowable for the purposes of s338 ITEPA or paragraph 3 of part VIII of schedule 3 to the Social Security (Contributions) Regulations 2001.

In considering the remaining issues, the Tribunal found the following:

  • The Regulation 80 determinations were valid;
  • ESL were not entitled to reimburse expenses using benchmark scale rates as it had not applied for or been granted a dispensation;
  • ESL did not have a right of SDC over any relevant employee who received a reimbursement of expenses in the 2016-17 tax year;  and
  • Payments relating to reimbursement of expenses incurred by an employee attending a permanent workplace are earnings for NIC purposes.

The importance of this case is in its consideration of mutuality of obligation in determining the type of employment contract that exists and clearly follows the recent clarification found in the Court of Appeal in both HMRC v PGMOL and HMRC v Atholl House.

The crucial fact to take away from this case is that there have to be sufficient ‘employment-related’ obligations in the gaps between assignments for the overarching umbrella contract to be considered a single employment contract. Instead, each assignment must be considered a separate employment, due almost entirely to the lack of mutuality, therefore disallowing the payment of tax-free expenses.

This case highlights how the importance of a strong contract cannot be overlooked when considering mutuality. Further, the question of whether a worker is in business on his/her own account is becoming more of a significant factor when considering employment status as a whole.

If you are operating as an umbrella company, or generally wish to discuss the impact of this judgement on your business arrangements, please feel free to contact The Guild for a no-obligation discussion.


If you would like to raise anything we’ve discussed in this article, please contact us at [email protected] and talk to our expert team. We’re here to help.

How can The Guild help?

The Guild has in-house ex-HMRC Employer Compliance and CIS experts who can help you with an HMRC enquiry, whether at the outset of the review or at a point where HMRC demands are escalating.


The content of this article is for guidance only and shall not constitute advice. Please seek independent advice or contact The Guild for information about its services.

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