Reed £158m travel expenses ruling: staffing companies urged to get contracts right to avoid HMRC action
16 April 2014
Industry experts tell Recruiter that staffing companies that operate umbrella arrangements need to get their temporary workers’ contracts right or face potential claims from HM Revenue and Customs (HMRC) for tax on travel and subsistence expenses.
Wed, 16 Apr 2014
Industry experts tell Recruiter that staffing companies that operate umbrella arrangements need to get their temporary workers’ contracts right or face potential claims from HM Revenue and Customs (HMRC) for tax on travel and subsistence expenses.
This follows a Tax Tribunal ruling this week that Reed faces a liability of up to £158m after losing its umbrella workers’ expenses claim against HMRC.
The Upper Tax Tribunal backed a ruling by a First Tier Tax Tribunal in 2012 that Pay As You Earn (PAYE) and National Insurance Contributions (NICs) should have been paid on the entirety of salaries paid to Reed’s directly employed temporary workforce between 1998 and 2006.
Over this period, Reed described part of the salary earned by these workers as expenses for travel to work and these were paid without deductions for PAYE and NICs. Deductions were made on the remainder of the salaries.
Reed argued that because HM Revenue and Customs (HMRC) originally allowed these arrangements, it could not now be expected to pay PAYE and NICs on expenses paid to these workers.
However, the Upper Tribunal has now endorsed the view of the earlier tribunal that the expenses payments were part of the temps’ ordinary salary, meaning that PAYE and NICs were due. Following the ruling, Reed says it will be seeking leave to appeal.
According to Kevin Barrow, a partner at law firm Osborne Clark, a key element of the decision that could have ramifications for those running travel and subsistence schemes is whether umbrella contracts genuinely continue between assignments.
Barrow explains that unless there is enough ‘glue’ for the relationship between the worker and the employer to continue between assignments, HMRC could take action against other companies that operated or operate similar arrangements. Such action could lead to HMRC making an assessment for unpaid tax and national insurance, says Barrow.
Barrow advises companies to review their umbrella arrangements in the light of the Reed case to strengthen the ‘glue’ between the worker and the employer, not only during each assignment, but between assignments.
In legal terms, Barrow says, the glue equates to mutuality of obligations. Barrow says a key point from the Upper Tribunal decision was that it felt there was insufficient mutuality of obligation on each side between assignments, such that each assignment was at a temporary workplace and therefore justified tax-free travel expenses.
Barrow says the best way to strengthen the glue is to pay umbrella workers between assignments. He says this is relatively easy if the worker has a skill that means they are constantly in demand, so that any gaps are effectively paid holiday. It is not as easy if a worker’s skills are less in demand and there are significant gaps between assignments, during which the employer receives no income.
David Heaton, a tax partner at chartered accountants and business advisers Baker Till, says the big lesson of the Reed case is “get the contract right”.
Heaton tells Recruiter: “It seems that the contracts they were on meant there wasn’t enough of a link between Reed and the worker – that is what the tribunal said.”
Heaton says Reed could have demonstrated a stronger relationship with their umbrella workers by including contractual obligations “to find work for these people and a retainer when no work was available, even it was only the minimum wage.”
But, Heaton adds, the Upper Tribunal found that that Reed’s contractual obligations to its employed temps “at their highest amounted only to use its best endeavours to find a placement, and the employees were under no obligation to accept what was offered.”
Andy Hogarth, chief executive officer at Staffline tells Recruiter that the judgment “seems to be quite wide-ranging, and therefore it is applicable to all travel and subsistence schemes.”
Hogarth adds: “It is certainly encouraging they have come to such a definitive judgment; it is helpful for the industry to understand what the rules are going forward.’’
This follows a Tax Tribunal ruling this week that Reed faces a liability of up to £158m after losing its umbrella workers’ expenses claim against HMRC.
The Upper Tax Tribunal backed a ruling by a First Tier Tax Tribunal in 2012 that Pay As You Earn (PAYE) and National Insurance Contributions (NICs) should have been paid on the entirety of salaries paid to Reed’s directly employed temporary workforce between 1998 and 2006.
Over this period, Reed described part of the salary earned by these workers as expenses for travel to work and these were paid without deductions for PAYE and NICs. Deductions were made on the remainder of the salaries.
Reed argued that because HM Revenue and Customs (HMRC) originally allowed these arrangements, it could not now be expected to pay PAYE and NICs on expenses paid to these workers.
However, the Upper Tribunal has now endorsed the view of the earlier tribunal that the expenses payments were part of the temps’ ordinary salary, meaning that PAYE and NICs were due. Following the ruling, Reed says it will be seeking leave to appeal.
According to Kevin Barrow, a partner at law firm Osborne Clark, a key element of the decision that could have ramifications for those running travel and subsistence schemes is whether umbrella contracts genuinely continue between assignments.
Barrow explains that unless there is enough ‘glue’ for the relationship between the worker and the employer to continue between assignments, HMRC could take action against other companies that operated or operate similar arrangements. Such action could lead to HMRC making an assessment for unpaid tax and national insurance, says Barrow.
Barrow advises companies to review their umbrella arrangements in the light of the Reed case to strengthen the ‘glue’ between the worker and the employer, not only during each assignment, but between assignments.
In legal terms, Barrow says, the glue equates to mutuality of obligations. Barrow says a key point from the Upper Tribunal decision was that it felt there was insufficient mutuality of obligation on each side between assignments, such that each assignment was at a temporary workplace and therefore justified tax-free travel expenses.
Barrow says the best way to strengthen the glue is to pay umbrella workers between assignments. He says this is relatively easy if the worker has a skill that means they are constantly in demand, so that any gaps are effectively paid holiday. It is not as easy if a worker’s skills are less in demand and there are significant gaps between assignments, during which the employer receives no income.
David Heaton, a tax partner at chartered accountants and business advisers Baker Till, says the big lesson of the Reed case is “get the contract right”.
Heaton tells Recruiter: “It seems that the contracts they were on meant there wasn’t enough of a link between Reed and the worker – that is what the tribunal said.”
Heaton says Reed could have demonstrated a stronger relationship with their umbrella workers by including contractual obligations “to find work for these people and a retainer when no work was available, even it was only the minimum wage.”
But, Heaton adds, the Upper Tribunal found that that Reed’s contractual obligations to its employed temps “at their highest amounted only to use its best endeavours to find a placement, and the employees were under no obligation to accept what was offered.”
Andy Hogarth, chief executive officer at Staffline tells Recruiter that the judgment “seems to be quite wide-ranging, and therefore it is applicable to all travel and subsistence schemes.”
Hogarth adds: “It is certainly encouraging they have come to such a definitive judgment; it is helpful for the industry to understand what the rules are going forward.’’
