Reed Employment Plc v Revenue and Customs Comrs
| Jurisdiction | UK Non-devolved |
| Judgment Date | 09 April 2014 |
| Neutral Citation | [2014] UKUT 160 (TCC) |
| Date | 09 April 2014 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2014] UKUT 0160 (TCC)
Upper Tribunal (Tax and Chancery Chamber)
Mrs Justice Proudman DBE, Judge Timothy Herrington.
Mr Ian Glick QC, Mr Andrew Clarke QC, Mr David Ewart QC and Mr Adam Rushworth, Counsel, instructed by Slaughter and May, appeared for the Appellants
Mr Malcolm Gammie QC, Mr Adam Tolley and Miss Kate Balmer, Counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the Respondents
Income tax and NICs - Allowances for travel and subsistence costs - Character of allowances - Whether earnings under Income Tax (Earnings And Pensions) Act 2003 ("ITEPA 2003"), Income Tax (Earnings and Pensions) Act 2003 part 3 chapter 1Pt. 3, Ch. 1 - Yes - Or sums treated as earnings under ITEPA 2003, Income Tax (Earnings and Pensions) Act 2003 part 3 chapter 3Pt. 3, Ch. 3 - No - Whether recipients had permanent or temporary workplaces - Permanent - Travel costs ordinary commuting expenses and not deductible - Whether allowances within dispensations granted pursuant to ITEPA 2003, Income Tax (Earnings and Pensions) Act 2003 section 65s. 65 - No - Whether dispensations could lawfully be granted - No.Judicial review - Whether appellants had legitimate expectation that allowances would not be subject to income tax and NICs and that dispensations would not be revoked and HMRC would not seek income tax and NICs from employees retrospectively - No.Whether appellants under obligation as employers to make PAYE deductions in respect of allowances paid - Yes - Appeal and judicial review application dismissed.
The Upper Tribunal has upheld a First-tier Tribunal decision on the employment tax treatment of travel and subsistence arrangements by looking at what constitutes an effective salary sacrifice and a contract of employment in Reed Employment plcTAX[2012] TC 01727, ruling that there was no salary sacrifice arrangement in place as the employees had not sacrificed any of their salaries. The Upper Tribunal also refused Reed's application for permission for judicial review.
Reed is an employment agency and also supplies temporary workers to its clients. Whilst on assignment at clients the workers do not become employees of the client, but are employees of Reed. In an attempt to make use of the change in law from 1998, allowing employees to deduct travel expenses for travel to a temporary workplace and if covered by a dispensation such expenses not being taxable at all and not counting for National Insurance contribution (NIC) purposes, Reed made what it considered to be non-taxable payments to approximately 500,000 temporary workers between 1998 and 2006 to cover lunch and commuting expenses as part of a salary sacrifice arrangement. The arrangements were changed in April 2002 following concerns from HMRC so that the amount of payment of travel expenses was expressly shown on the employee's payslip. Reed negotiated five successive dispensations with HMRC to cover the arrangements, which Reed believed meant that the payments could be made free of PAYE and NICs. In 2006, HMRC revoked the last of the dispensations and subsequently assessed Reed to income tax and NICs which HMRC claim should have been deducted from salaries during the periods covered by the dispensations.
Reed appealed to the First-tier Tribunal. Reed also applied for judicial review on the ground that by HMRC agreeing to the dispensations and then revoking them retrospectively its actions breached Reed's substantive legitimate expectation that income tax and NICs would not be due in respect of the disputed travel and subsistence expenses. The judicial review application was transferred to the Upper Tribunal and stayed pending the First-tier Tribunal's decision on the tax appeals. The First-tier Tribunal ruled in favour of HMRC finding there was no salary sacrifice arrangement in place, as the employees had not sacrificed any of their salaries. In reality they were paid their salary in full, even if the figures shown on the payslip indicated that they received a combination of salary and travel and subsistence payments. Much was made of the contractual arrangements and the lack of clarity of the arrangements, with the First-tier Tribunal finding that employees could not understand their payslips. The First-tier Tribunal also ruled that the workers were engaged under a series of job-by-job contracts of employment rather than under an overarching contract of employment. Each assignment therefore had to be treated as a separate engagement, and thus the travel to each assignment was to a permanent rather than a temporary workplace and the expenses were deemed to be ordinary commuting and not deductible.
Reed appealed to the Upper Tribunal, which upheld the First-tier Tribunal decision and dismissed Reed's appeals. Reed contended that the First-tier Tribunal made errors in its findings of fact amounting to errors in law. But the Upper Tribunal did not find that any of the possible errors were significant to the decision. Although they did accept that it was wrong for the First-tier Tribunal to find that Reed would have gone ahead with the arrangements without a dispensation, causing the Upper Tribunal to instead find as fact that Reed would not have proceeded with the arrangements without a dispensation, this did not affect the Upper Tribunal's decision.
The Upper Tribunal also refused Reed's application for judicial review, finding that when applying for a dispensation it is for the applicant to supply the relevant facts and in this case the First-tier Tribunal found as fact that Reed did not volunteer all the details of the schemes and was "less than forthcoming" with HMRC. The Upper Tribunal found that HMRC's position might have been different if it had known that Reed planned to make large monetary savings for itself and therefore in line with R v IR Commrs, ex parte MFK Underwriting Agencies LtdTAX[1989] BTC 561, Reed did not "put all his cards face upwards on the table" and therefore failed to pass the test of open dealing on both sides underpinning the principle of legitimate expectation.
With a reported 158m at stake in income tax, NICs and interest it is likely that Reed will seek leave to appeal this decision.
The use of salary sacrifice arrangements can be beneficial for both employers and employees, but this case shows how important it is to ensure the relevant rules are understood and abided by and that communications with employees are clear so that they too understand the implications of the arrangements. Umbrella employers should note the dangers of not using contracts that keep the employment relationship alive during the gaps between assignments. The case also highlights the need to fully and accurately disclose all material information to HMRC when seeking their approval for something or a decision; this not only holds true for dispensation applications, but equally applies when for example making a disclosure under one of HMRCs campaigns or when seeking clearance or approval for a particular transaction.
Decision |
The decision of the FTT dated 6 January 2012 (Judges Bishopp and Avery Jones) |
Dispensations |
First dispensation granted on 30 November 1998; |
Second dispensation (replacing the first) granted on 9 January 2001; |
|
Third Dispensation (replacing the second) granted on 7 February 2002; |
|
Fourth Dispensation (replacing the third) granted on 7 March 2003; and |
|
Fifth Dispensation (replacing the fourth) granted on 3 February 2004. |
|
Disputed Allowances |
The sums paid to Employed Temps in respect of travel expenses which Reed contends were contractually separate payments to payments of salary. |
Employed Temps |
Employees of Reed placed on assignment with clients. |
ERA |
Employment Rights Act 1996. |
FTT |
First-tier Tribunal (Tax Chamber). |
HMRC |
Used as a shorthand term to include not only Her Majesty's commissioners for Revenue and Customs but also their predecessor bodies, the Inland Revenue, HM Customs & Excise and the Contributions Agency. |
ITEPA |
Income Tax (Earnings and Pensions) Act 2003. |
NICs |
National Insurance Contributions. |
Reed |
The appellants collectively. |
Relevant Period |
6 January 2001 to 5 April 2006. |
RR |
Robson Rhodes. |
RTA |
Reed Travel Allowance, the scheme introduced in 1998. |
RTB |
Reed Travel Benefit, the amended scheme which succeeded RTA in 2002. |
The Rules |
The Tribunal Procedure (Upper Tribunal) Rules 2008 (as amended). |
Schemes |
The RTA and RTB schemes. |
TCEA |
The Tribunals Courts and Enforcement Act 2007. |
Travel-to-work payment |
The supplement to temporary employees' pay Reed paid (subject to the deduction of tax and NICs) while the RTA scheme was in operation. |
UT |
Upper Tribunal (Tax and Chancery Chamber). |
[1]Reed appeals against the decision of the FTT dated 6 January 2012 which dismissed appeals by Reed against determinations and notices of decision assessing Reed as liable for approximately 158 million on unpaid income tax and NICs for the Relevant Period. Issues of quantum remain to be determined and are not the subject of these appeals.
[2]In the alternative, Reed applies for judicial review of those determinations and notices of decision.
[3]Paragraphs 4 to 14 below are taken largely from the helpful summary of the dispute between the parties contained in Reed's skeleton argument.
[4]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.
[5]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...
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