Agency Facing £158m Bill

Following a ruling that took nine months to reach, the Reed Group has lost its appeal against HMRC's decision to revoke an expenses dispensation after eight years and now faced with a tax bill of £158m, which includes interest, has called for a judicial review of its “unfair treatment” by the Revenue.

Around half a million workers took part in the Reed travel allowance schemes during the period 1998 – 2006. Reed's appeal rested on the employment status of its temporary workers, whether expenses were covered by PAYE dispensation and the nature of their salary sacrifice scheme under which Reed refunded a portion of the tax saved to its temps.

Background

In 1998 Reed decided to make temporary workers employees within a number of its staffing agency subsidiaries. Following advice from accountancy firm Robson Rhodes, Reed employees were given the option of joining their travel allowance scheme. Under the salary sacrifice scheme employees would receive a lower amount of gross pay but their income would be enhanced by way of a tax free scale payment based on temporary workplace rules. Reed also made substantial income tax and NIC savings from this arrangement.

HMRC granted Reed a PAYE dispensation in 1998 which was revised to reflect higher scale rates. Allowances covered by the dispensation were only paid to employees incurring qualifying travelling expenses on temporary assignments and, as such, the payments were not earnings and therefore not taxable or subject to NIC.

The Revenue's suspicions were aroused following a number of calls they were receiving from Reed employees about the scheme until eventually it revoked the fourth revision of the dispensation in April 2006.

HMRC argued that the travel allowances were part of the temporary workers salary and not reimbursement of deductible travelling expenses. They also considered that each workplace was a permanent workplace for the duration of each assignment and therefore travelling expenses incurred to and from these locations was ordinary commuting and not tax deductible.

Both Reed and Robson Rhodes staff involved in setting up the travel allowance scheme found it difficult to truly define the reality of the scheme, described as “a device by which Reed exploited the potential for its employed temps to obtain tax relief for their travelling and subsistence expenses, not in order to enhance their earnings, but for its own benefit.”

The decision

The presiding judges highlighted the following key issues in reaching their decision:

Was there an effective salary sacrifice made by the temps?

No because Reed appropriated a significant part of the saving for itself and therefore did not provide a benefit to the employee. It was not therefore a true salary sacrifice.

Did the allowances fall within Chapter 1 or 3 ITEPA 2003?

The Tribunal found that the allowances were emoluments falling within Chapter 3 and could therefore be covered by dispensation but this was secondary to the workers' employment status. If a workplace was permanent then the allowances would be taxable earnings under Chapter 1.

Permanent or temporary workplaces?

Whilst a contract of employment existed between Reed and its temporary workers, there was no mutual obligations post assignment or between engagements. Reed would try to find work for the temps but such an offer of work could be declined by the temps. The employment agency exercised no control over the temps when they were not on assignment and the contracts themselves did not contain the necessary provisions to make them contracts of service. Whilst the Tribunal accepted that a contract of some description existed, there was no contract of employment when a temp was not on assignment.

Were the allowances covered by the dispensation?

No because the allowances were taxable earnings (as above).

Following the Tribunal's decision Reed has requested a judicial review of HMRC's decision to revoke the dispensations retrospectively despite not having discovered any material misrepresentations.

4 Comments

  • IT Contractor says:

    Based on a past encounter with them I’d love to see Reed go bust, but I do feel that HMRC’s conduct here is beyond the pail: How many contractors, working through limited companies where agency/client has even less MOO/control than here, and no party ever wanted or intended an employment relationship, get threatened with IR35 when it suits HMRC to use that route of argument to line their coffers instead? Come on HMRC, show some consistency of criteria here, please!

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