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Umbrella company tripped up by travel expenses

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This appeal concerned whether an umbrella company could deduct reimbursement of travel expense payments to its employees for income tax and national insurance contributions.

6th Feb 2024
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The upper tribunal (UT) has agreed with the first tier tribunal (FTT) that Exchequer Solutions Limited (ESL) is liable for £11m in national insurance contributions (NICs) and tax because travel and subsistence expenses paid to construction workers were deemed to be disallowable.

This appeal (Exchequer Solutions Limited (ESL) vs HMRC [2024] UKUT 00025) is by the umbrella company against the decision of the FTT (tax chamber) concerning whether ESL could deduct reimbursement of travel expense payments to its employees for the purposes of income tax and NICs.

Over-arching contract of employment 

The key issue before the UT was whether there is an overarching contract of employment that also covers the gaps between the assignments (“the overarching contract” issue). If there is an overarching contract of employment, the different assignment locations are “temporary work locations” with the result that ESL is not liable to PAYE and NICs on its reimbursement of travel from the employee’s home to their place of work.

If there is not an overarching contract of employment and ESL is only the employer during the period(s) of assignment, each place of work is a “permanent place of work” in respect of each separate assignment. The reimbursement of travel expenses is then disallowed because the expenses are ordinary home-to-work commuting expenses.

In order to establish the contract of employment and whether it was overarching or not, there needs to be some form of “mutuality of obligation” between the employer and employee. The FTT agreed with HMRC that the required mutuality was missing and that there was no overarching contract of employment.

Grounds for appeal 

HMRC made regulation 80 determinations to recover income tax on the disputed payments. ESL argued that these were invalid but, the FTT disagreed. The FTT also rejected ESL’s argument that the reimbursement payments were “earnings” for NIC purposes. So, ESL was appealing on the grounds of the overarching contract issue, the Regulation 80 validity issue and the NIC earnings issue.

Establishing whether the contract of employment exists under the principles of common law is necessary because of the legislation on travel expense reimbursement. With regards to tax, it is s338 Income Tax (Earnings and Pensions Act) 2003 (ITEPA) and the relevant NIC legislation applies these provisions.

The reference to “employment” in the legislation means the common law meaning of employment. The parties broadly agreed on the basic case law principles but differed on their application. The disputed points between the parties were the legal principles of establishing a contract of employment.

Solid starting point

The conventional starting point of whether a contract of employment exists is the three-step test in that old favourite Ready Mixed Concrete (South-East) Limited vs Minister of Pensions and National Insurance [1968] 2 QB 497 (RMC). The main issue in ESL, with reference to RMC, was the point on mutuality of obligations and whether the overarching contract of employment existed in the gaps between assignments as well as during the assignment. It was common ground that the contract of employment existed during the assignment.

In the mutuality of obligations the parties agree that “if there is no obligation to work (in the way work is normally understood – providing the opportunity for the employee to deploy mental or physical effort, whether contingent or minimal) and no obligation to accept work (whether contingent or minimal), then there is no mutuality.”

There is also broad agreement that mutuality requires “some obligation to provide work and to accept it but disagreement around what counts as work and the minimum requirements”.

No work obligation

The UT found that the challenge by ESL was unsuccessful and agreed with the FTT that “…there was no work obligation, not even a contingent obligation, and no obligation to accept (not even a contingent obligation).” There was, therefore, no overarching contract of employment.

The tribunal did consider whether the supreme court judgment in the PGMOL case, which is being awaited, should cause the proceedings to be stayed pending the outcome. HMRC suggested that the PGMOL case was concerned with a different topic. PGMOL was looking at when the football referees were working, whereas this case is looking at when the workers weren’t working between assignments.

The tribunal found that the regulation 80 determinations were valid, but that it would have been preferable for the class to be specified by HMRC with more detail on the form. However, HMRC’s skeleton refers to the difficulties faced in obtaining information from ESL.

Commuting expenses

ESL’s argument was based on a structural difference between NIC and tax. ESL submitted that it is significant that NIC look to a “profit” whereas tax takes a gross sum then accounts for a deduction in primary legislation. Basically, the scope of such deductions is not relevant to the prior question of what constitutes earnings anyway.

The sole question is whether the payment was a reward for services. Once it had been decided there was no overarching contract of employment, the travel to each individual assignment was travel to a permanent workplace – in other words ordinary commuting expenses. For those reasons, the UT agreed entirely with the FTT in rejecting ESL’s argument that reimbursement of commuting expenses, although subject to tax, escaped the scope of NICs.

Guidance on mutuality of obligations

This case gives very good guidance on mutuality of obligations between assignments and indeed, that was the purpose of the original test when it was used in Carmichael vs National Power plc [2000] IRLR 43, HL. That case concerned the overarching contract of employment, which ironically is also known as the umbrella contract but, that was in the field of employment law.

It has been my argument for a long time now that mutuality of obligations is a completely different test when it comes to looking at the period of time when the worker is on assignment. It was made clear in Carmichael that the court was not looking at when the station guides were working as is the case in ESL. In tax cases concerning when the worker is working, IR35 or off-payroll working for example, mutuality of obligations should be an entirely different test because there are invariably basic contractual obligations that are always present.

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