Reed Employment Plc and Others v Revenue and Customs Commissioners
| Jurisdiction | England & Wales |
| Judge | Lord Justice Lewison,Lord Justice Floyd,Lord Justice Longmore |
| Judgment Date | 28 July 2015 |
| Neutral Citation | [2015] EWCA Civ 805 |
| Docket Number | Case No: A3/2014/1817 |
| Court | Court of Appeal (Civil Division) |
| Date | 28 July 2015 |
[2015] EWCA Civ 805
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE UPPER TRIBUNAL
TAX AND CHANCERY CHAMBER
FTC342012
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice Longmore
Lord Justice Lewison
and
Lord Justice Floyd
Case No: A3/2014/1817
Mr Ian Glick QC, Mr Andrew Clarke QC, Mr David Ewart QC & Mr Adam Rushworth (instructed by Slaughter & May) for the Appellants
Mr Malcolm Gammie QC, Mr Adam Tolley QC & Ms Kate Balmer (instructed by The Solicitors Office, HMRC) for the Respondents
Hearing dates : 21 and 22 July 2015
Introduction
Reed Employment plc ("Reed") appeals from the decision of the Upper Tribunal (Tax and Chancery Chamber) (Proudman J and Judge Herrington) dismissing its appeal against the decision of the First Tier Tribunal (Judge Bishopp and Judge Avery-Jones) that payments made pursuant to two sets of arrangements with employees relating to travel expenses were taxable earnings in the hands of the employees and hence liable for PAYE and National Insurance Contributions ("NICs"). The Upper Tribunal also refused permission to apply for judicial review of a decision by HMRC to issue determinations and charge tax on those arrangements despite having granted a "dispensation" stating that no additional tax would be payable. The decision of the Upper Tribunal is at [2014] UKUT 160 (TCC), [2014] STC 1882. The decision of the First Tier Tribunal is at [2012] UKFTT 28 (TC), [2012] SFTD 394. The appeal is brought with the permission of the Upper Tribunal. There is approximately £158 million in dispute, although issues of quantum remain to be determined.
Factual background
I take the essential facts from the decision of the Upper Tribunal.
Reed is a well-known employment agency. It operates both an employment agency (properly so called) and an employment business: that is, a business that supplies temporary workers to clients of Reed. Reed sends these workers to clients on assignment. The workers do not become employees of the clients, but are employees of Reed, and are usually known as employed temps.
The appeal relates to two successive sets of arrangements operated by Reed which were intended to make use of changes to the law relating to travel expenses paid to employees. Travel expenses also include subsistence expenses but it not necessary to distinguish between them.
Those changes in the law were originally made in 1998 and the relevant provisions were at that time contained in the Income and Corporation Taxes Act 1988. These provisions are now contained in Parts 3 and 5 of the Income Tax (Earnings and Pensions) Act 2003 ("ITEPA"). For the purposes of this appeal, there is no material difference between the two statutes in this regard and consequently like counsel and both Tribunals I refer only to the relevant provisions of ITEPA.
Before 1998, employees could not deduct any travel expenses for travel from home to work from their taxable earnings, and so Reed remunerated employed temps on the basis that they would have to pay such expenses out of their salaries: that is out of their net (after tax) earnings. Since 1998, payments to an employee in respect of travel expenses for travel to a temporary workplace falling within Chapter 3 of Part 3 and Chapter 2 of Part 5 of ITEPA have been deductible by that employee from his taxable earnings provided they constitute the reimbursement of expenses actually incurred. This system operates by bringing the payment into charge under Chapter 3 of Part 3, but then permitting a deduction to be made. The additional charge and the deduction will in many cases be self-cancelling. Chapter 3 of Part 3 is part of what ITEPA calls the "benefits code".
In addition there is a mechanism under section 65 of ITEPA by which HMRC can issue a "dispensation." This is a notice issued by HMRC stating that in relation to particular payments, benefits or facilities no additional tax is payable by virtue of the benefits code. While such a dispensation remains in force the specified payments or benefits need not be brought into account for tax purposes. Thus the employer need not account for PAYE on such payments or benefits; and they do not count for NIC purposes.
Following the changes in the law and having received advice from its accountants, Robson Rhodes, Reed tried to make arrangements that would enable it to make non-taxable payments to its employed temps in respect of their travel expenses. The intention was that these arrangements would (if effective) produce a saving both of income tax and employer's NICs part of which would be shared with the employed temps. Reed instructed Robson Rhodes to negotiate a dispensation with HMRC to cover the proposed arrangements, which Robson Rhodes proceeded to do. Between 6 January 2001 and 5 April 2006 there were many meetings and other contacts between Robson Rhodes and HMRC relating to how the arrangements operated, or would operate, and to permitted levels of expenses.
The first set of arrangements, the Reed Travel Allowance ("RTA"), operated from 1998 until April 2002. The second set of arrangements, the Reed Travel Benefit ("RTB"), operated from April 2002 to April 2006.
Under both the RTA and the RTB, Reed's case is that it paid employed temps less by way of salary than would otherwise have been the case, together with (contractually separate) payments in respect of travel expenses. This type of structure is colloquially (but inaccurately) known as a "salary sacrifice". Under the RTA, the payment reimbursing expenses did not appear expressly on an employed temp's payslip but Reed contends that it was calculable from the figures shown. Following concerns expressed by HMRC over the payslips, Reed replaced RTA with RTB under which the amount of the payment of travel benefit was expressly shown on the payslip.
If these arrangements were effective, Reed would leave the employed temp with at least the same net after tax pay as he or she would have had before the arrangements were implemented with Reed having to account for less tax and employer's NICs to HMRC in respect of that pay.
Under both the RTA and the RTB, Reed paid part of the income tax and employee NICs it believed it had saved to its employed temps. Under the RTA (but not the RTB) this was done by means of what were called 'travel-to-work payments' or 'travel allowances' added to the employed temps' remuneration. It is not in dispute that these payments or allowances were taxable and income tax and NICs were duly paid in respect of them. Reed kept the majority of the savings under the RTA for itself (the proportions of which changed in the employed temps' favour when the RTB replaced the RTA) and also kept all the benefit of the reduced employer's NICs saved.
As a result of the discussions with HMRC, the relevant payments were covered by five successive dispensations which HMRC gave to Reed and which, Reed believed, had the effect that the payments could be made free of PAYE and NICs.
By 2004 HMRC were beginning to have concerns about the arrangements and after a series of meetings and extensive correspondence in 2006, HMRC revoked the last of the dispensations with effect from 5 April 2006. In February 2007, HMRC made determinations under the Income Tax (Pay As You Earn) Regulations 2003 and issued notices of decision under the Social Security (Contributions) Regulations 2001 assessing Reed for sums in respect of income tax and employee NICs that HMRC claims Reed should have deducted from employed temps' salaries and paid over to it, and for sums in respect of employer's NICs for which HMRC claims Reed should have accounted during the periods covered by the dispensations.
The proceedings and issues
Reed appealed to the FTT against the determinations and notices of decision. It also applied for judicial review to quash them on the ground that HMRC's actions breached its substantive legitimate expectation, based on the dispensations, that income tax and NICs would not be due on the allowances covered by the dispensations. In due course the judicial review application was transferred to the Upper Tribunal and was stayed pending the hearing of the tax appeals by the FTT (although the FTT also found facts that might be relevant only to the judicial review application). Before the transfer Henriques J, sitting in the Administrative Court, ordered that the application for permission should be treated as the substantive hearing. Although the Upper Tribunal dealt with the application on that basis its formal decision was a refusal of permission to apply for judicial review.
The Upper Tribunal dealt with a number of issues, not all of which were raised on this appeal. Those that were raised are the following (which I have renumbered):
i) Issue 1. Under the employed temps' contracts of employment did Reed (a) make payments reimbursing the employed temps' travel expenses in addition to paying their wages or (b) make a single global payment in which the payment on account of travel expenses was simply part of the employed temps' overall wages. Reed contends for (a). HMRC contend for (b); and both the FTT and the Upper Tribunal agreed with HMRC. If (but only if) Reed succeed on issue 1:
ii) Issue 2. Did the employed temps travel to temporary or permanent workplaces? Reed contends that they travelled to temporary workplaces. HMRC contend that they travelled to permanent workplaces and both the FTT and the Upper Tribunal agreed with HMRC. If (but only if) Reed succeed on...
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