Reed Employment’s appeal dismissed by Tribunal

On 9 April 2014 the Upper-tier Tax Tribunal released its judgment in the long running saga of Reed Employment’s dispute with HMRC over its travelling and subsistence scheme. The Upper Tribunal has dismissed Reed’s appeals, although this is unlikely to be the end of this saga.

For those unfamiliar with the case, Reed Employment plc and 11 of its staffing companies had been in dispute with HMRC since around 2004 regarding the operation of a salary sacrifice scheme whereby Reed’s temps were paid travelling and subsistence allowances in lieu of the salary they had sacrificed. This is a common arrangement operated by some umbrella companies.

There were various issues disputed in the Reed case (see below), but the most significant one for most umbrella companies is the dispute about whether Reed’s contract was sufficiently ‘overarching’ so that the temps could qualify for travelling and subsistence payments free of tax and NIC under the temporary workplace rules.

As the arrangements involved some 16,000 temps over several years, the headline-grabbing figure of £158 million in back duty is at stake in these appeals. However, the principles are equally applicable to even the smallest travel-to-work payment and so any employer making payments for travel to a temporary workplace is advised to take heed of this case.

Before delving into the expenses aspect, there were some interesting issues on the sidelines to report.

Firstly (and somewhat bizarrely) a major part of HMRC’s case centred on just how worthless dispensations really are when it comes to the comfort of knowing you have agreed matters with HMRC. In this case HMRC had previously agreed the tax treatment of the expenses payments with Reed and had provided them with a series of dispensations (5 in total) covering a number of years.

However, HMRC argued that the dispensations could not save Reed as they could not lawfully cover amounts that were effectively taxable earnings, on top of which HMRC felt that Reed had been less than forthcoming in its detail of how it intended to apply the dispensations (which HMRC alleged was largely for Reed’s own benefit, as the temp’s pay was adjusted so that most of the tax and NIC savings ended up in Reed’s own pocket).

The Tribunal agreed that the dispensations had very limited effect. When coupled with the fact that HMRC can withdraw a dispensation at any time (including on a retrospective basis) the ultimately valueless nature of a dispensation is exposed.

A further twist to this tale is the difficulties of operating an effective ‘salary sacrifice scheme’ when it comes to paying travel and subsistence expenses. Reed had attempted to run this type of system, but the lack of transparency and comprehensibility together with practical difficulties of lawfully agreeing to sacrifice an unknown variable amount of salary each week became obvious, and their salary sacrifice system fell foul of the law.

The main battleground however was whether or not Reed had put in place an overarching contract of employment with the temps. Disastrously (and quite astoundingly) two of the terms in Reed’s contract were:

“..the duration of the employment will be for the duration of the assignment…with the Client”


“The Temporary Employee is under no obligation to accept an offer of an assignment”

As anybody with even limited knowledge of this field will know, these types of clauses are disastrous to an argument that a contract is overarching. The Tribunal held that the contracts were not overarching, which may not come as much of a surprise; however there was also some commentary in this case indicating that a continuous employment for employment rights purposes does not necessarily indicate a continuous overarching employment for tax purposes.

HMRC have already updated their internal guidance on overarching contracts of employment. This case does not change the position, but it is a timely reminder that anybody paying travelling and subsistence payments should make sure they are satisfied that their contract meets the ‘overarching test’.

In summary, this case illustrates a litany of errors – an ineffective salary sacrifice scheme, a contract that was not even close to being overarching, and a “cock-up” (HMRC’s own words) in granting a series of dispensations.

The case has rumbled on for over a decade already and probably has a few more years’ litigation yet to go. Given the amounts at stake and HMRC’s own errors it is inconceivable that Reed would not apply for permission to appeal further to the Court of Appeal.

We have seen it reported elsewhere that: “following the outcome of the case, there is a possibility that HMRC could challenge companies running travel and subsistence schemes that operated before 2006”. This is unnecessary scaremongering. There are assessing time limits on HMRC for retrospective action (HMRC would need to prove deliberate default to go back this far, and the collection of National Insurance is governed by the 6-year time limit in the Limitation Act). In addition, the 2006 date is entirely arbitrary and based on the timing of the assessments raised on Reed at the point HMRC decided to formalise the dispute.

In short, if your contract is overarching and your expenses are genuine, properly claimed and evidenced, this judgment is of no significance. If you are in doubt, seek advice.

General advice:

It was held by the Tribunal in this case that the Reed scheme was aggressive and operated to Reed’s benefit, but also that it was not illegitimate. The fact that there may have been very little benefit to the temp was not central to the Tribunal’s ruling.

Having said that, the general flavour of the judgment is that if you are going to enter into arrangements such as Reed attempted to put in place, you had better make sure that the i’s are dotted and the t’s are crossed, and expect scrutiny from HMRC.

If you are involved in a ‘salary sacrifice scheme’ of any nature this judgment is food for thought – it may be time to review the arrangements to ensure that they are effective to prevent risk of liability.

Employers operating under a dispensation cannot take comfort from the mere fact that they hold a dispensation – expenses need to be policed carefully and the dispensation is unlikely to save you in a situation where tax becomes due. You need to stick closely within the terms of your dispensation, and ensure that your contract is overarching and the temporary workplace rules are met.

Employers are advised to review their contracts to ensure that they are sufficiently overarching, and consider revisions if there is any doubt.


Published: 04.17.14 - Posted In: Latest News