Exchequer Solutions Ltd v R & C Commissioners

JurisdictionUK Non-devolved
Judgment Date24 January 2024
Neutral Citation[2024] UKUT 25 (TCC)
CourtUpper Tribunal (Tax and Chancery Chamber)
Exchequer Solutions Ltd
and
R & C Commrs

[2024] UKUT 25 (TCC)

The Chancellor, Judge Swami Raghavan

Upper Tribunal (Tax and Chancery Chamber)

PAYE & NIC – travel and subsistence expenses paid by umbrella company servicing construction industry clients– whether mutuality of obligation to constitute overarching contract of employment or whether arrangement amounted to series of individual assignments in which case travel expenses not allowable as ordinary commuting expenses – FTT correct to find no overarching contract of employment – FTT also correct to reject appellant's argument that regulation 80 Income Tax (Pay as You Earn) Regulations 2003 invalid and that reimbursement of expenses were not subject to NICs – Appeal dismissed.

Abstract

In Exchequer Solutions Ltd v R & C Commrs [2024] BTC 504, the Upper Tribunal (UT) upheld the decision of the First-tier Tribunal (FTT), finding that there was insufficient mutuality of obligations between the assignments for employment to be continuous and each assignment was effectively a separate employment. Accordingly travel and subsistence payments made to contract workers by an umbrella company were earnings for both PAYE and NICs.

Summary

Exchequer Solutions Ltd (ESL) operated as an umbrella company, acting as the employer for workers in respect of assignments with end-clients. ESL did not actively find or provide the work. Individual workers were offered assignments through a variety of employment agencies which did not want the responsibility of acting as the employer, so referred workers to ESL (or in some cases the workers approached ESL directly) to act as an intermediate employer, paying the workers through its PAYE scheme.

ESL paid the workers partly in the form of earnings subject to PAYE and Class 1 NICs, and partly as tax (and NICs) free expenses, on the basis that, because the assignments lasted for less than 24 months, the employees were attending a series of temporary workplaces. The key issue was whether there was a continuous overarching contract of employment which subsisted during any gaps between assignments, or whether there was a separate contract in respect of each assignment. If there was a continuous contract, each assignment would be a temporary workplace if it lasted for less than 24 months, so that tax (and NICs) relief would be available for both the travel and subsistence expenses. If there was no such continuous contract, each assignment would represent a permanent workplace regardless of its duration and no relief would be available for the expenses.

The FTT (in Exchequer Solutions Ltd) had held that there was insufficient mutuality of obligations during the periods between the assignments for employment to be continuous. In a useful analysis of the mutuality of obligations test arising from Ready Mixed Concrete (South East) Limited v Minister of Pensions and National Insurance [1968] 2 QB 497, the FTT had set out three conditions it regarded as necessary for mutuality to subsist in an overarching contract:

  • ongoing obligations on the part of both the employee and employer throughout the duration of the contract, including any period when the employee is not working;
  • an obligation on the employer to provide some work (but not necessarily a guaranteed minimum) or to pay a retainer or provide some other meaningful benefit while the employee is not working;
  • an obligation on the employee to accept at least some of the work offered.

ESL argued that the FTT had erred in law and that it was obliged to “endeavour to provide or procure future work”, while the workers were obliged to accept some or a reasonable amount of work – and that the combination of these obligations was sufficient to form an ongoing mutuality. Also, that during the period, ESL continued to provide a “meaningful benefit” in the form of statutory employment rights and in its efforts to expand the base of agencies to which it offered employment services.

However, the UT was not persuaded and agreed with the FTT that ESL was not obliged to offer any work at all. An obligation to endeavour to provide work was not the same as an actual obligation to provide work. In fact, ESL did not provide work at any time and the UT found that there was no work for it to provide. Therefore, the question of whether the individuals were obliged to accept work did not arise because there was nothing for them to accept. Assignments were found and offered by the employment agencies. ESL simply contracted to provide the employment service. During non-working periods, the employees were not paid or provided with any significant ongoing benefits other than any statutory rights which might (though only if the relevant conditions were met) arise from their employment. ESL’s efforts in broadening of its agency base was not a benefit to the individual workers; it was a benefit directly to ESL because those agencies were ESL’s clients. The UT therefore rejected all ESL’s arguments on the continuation of mutuality of obligations and upheld the FTT’s original findings that each assignment was effectively a separate employment.

The UT then went on to consider ESL’s contention that the SI 2003/2682, reg. 80 determination raised by HMRC was invalid because it had failed to specify a “class or classes of employees” to whom it should be applied. In the column headed “Name and National Insurance number of employee”, HMRC had simply inserted the words “payments of non-allowable expense”. The UT held that, taking into account the provisions of TMA 1970, s. 114, this was sufficient because it was relevant to take into account the surrounding correspondence between ESL and HMRC, from which it was clear that these words meant “the class of employee to whom unallowable expenses had been paid”. The UT agreed that the form could have been made clearer but accepted that the FTT had been entitled to find that anyone with knowledge of HMRC’s covering letter would be in no doubt as to which employees the determination was intended to cover.

Finally, the UT considered ESL’s argument that travel expenses were not, in any event, “earnings” within the meaning of the Social Security (Contributions and Benefits) Act 1992, s. 3(1)(a), which defines earnings as “any remuneration or profit derived from an employment” for the purposes of NICs.

ESL contended that travel expenses were not earnings if there was no element of bounty or reward in the reimbursement and the expenses were incurred necessarily for the worker to perform the duties of the employment. While accepting that if the expenses were earnings there could be no corresponding disregard for NICs in respect of travel from home to a permanent workplace, ESL cited Cheshire Employer and Skills Development Ltd (formerly Total People Ltd) v R & C Commrs and R & C Commrs v Murphy in support of its argument that the expenses were not earnings in the first place. Whereas in tax legislation, ITEPA 2003, s. 70 and s. 72 deem expenses to be earnings (before considering whether a corresponding deduction may be available to offset against that expense), in NICs legislation there is no such deeming provision. The Murphy case similarly confirmed that an exclusion from earnings is not necessarily limited to expenses incurred in the performance of employment duties, for example, it could include travel between two workplaces.

The UT rejected ESL’s argument as misreading the judgements in those cases. Both Cheshire and Murphy drew a contrast between the situation in which the employer was simply making good an expense which one would not expect an employee to pay from their own pocket and the payment of expenses from which the employee gains a financial benefit. In this case, having already found that there was not a continuous overarching contract, it was clear that employees were receiving a financial benefit, because they received a reimbursement of ordinary commuting expenses, which they would normally have been expected to fund from their own pockets.

The appeal was dismissed on all grounds.

Comment

Given the potential value of the principle at stake to the numerous umbrella companies using a similar model to ESL, an appeal was almost inevitable, but the outcome does not come as a surprise. This may not be the last word on the matter though – the importance of the distinction between a single overarching contract and a series of individual contracts has arisen before, notably in R & C Commrs v Professional Game Match Officials Limited, for which a Supreme Court decision is still awaited.

Comment by Martin Jackson, Senior Tax Writer, Croner-i Ltd.

Giles Goodfellow KC and Philippe Freund, Counsel, instructed by Fieldfisher LLP appeared for the appellant

Adam Tolley KC and Sadiya Choudhury, Counsel, instructed by the General Counsel and Solicitor to His Majesty's Revenue and Customs appeared for the respondents

DECISION
Introduction

[1] This is an appeal against a decision of the First-tier Tribunal (Tax Chamber) (“FTT”) published as Exchequer Solutions Ltd[2022] TC 08506 (“FTT Decision”) concerning whether Exchequer Solutions Limited (“ESL”) could deduct reimbursement of travel expense payments to its employees for the purposes of income tax (PAYE) and National Insurance Contributions (“NICs”).

[2] ESL is a so-called umbrella company servicing the construction sector. It contracts with construction sector employment agencies (who match individuals to specific construction work assignments with end user clients) agreeing to take on the role of employer of the individuals undertaking the assignments; a role neither the end user client nor employment agency wish to take on. The parties agree that ESL is the relevant individual's employer during the period of the construction assignment. The contested issue is whether there is an overarching contract of employment which also covers the gaps in between the assignments (“the overarching contract” issue). That issue affects ESL's...

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