Victory for HMRC over Reed in travel claim case

The tax tribunal has found in favour of HM Revenue and Customs in a £158 million 'travel allowances' case involving Reed Employment and relating to the tax treatment of certain payments to Reed's temporary employees.

The decision follows a month long hearing in March 2011 and is likely to be of interest to tax and employment practitioners, as well as all those organisations and individuals involved in travel and subsistence payments for temporary staff. The Tribunal considered whether Reed's various travel allowance schemes were incorporated into its temporary employees' contracts by way of an effective salary sacrifice. The Tribunal then went on to consider whether, if there was an effective salary sacrifice, the travel allowances represented the reimbursement of expenses or were simply part of the temps' salary and, in any case, whether the expenses were deductible.

HMRC's barristers, including Malcolm Gammie QC, successfully argued that Reed's various travel allowance schemes did not amount to an effective salary sacrifice. In any event, they claimed, even if there had been an effective salary sacrifice, any such allowances were ordinary commuting expenses and a personal benefit taxable under Chapter 1 of ITEPA 2003. In any case, Reed's temporary employees were not engaged under an overarching, or 'umbrella', contract of employment.

Accordingly, in travelling to each assignment, the temporary employees were travelling to a permanent, rather than a temporary, workplace for the purposes of s.338 and 339 of ITEPA.

The expenses were therefore non-deductible.

The tribunal concluded: "We are satisfied that the allowances, although purportedly covered by a dispensation, were Chapter 1 earnings; that even if that conclusion is wrong they were Chapter 3 earnings which did not attract relief because they were paid (if they were truly paid at all) to reimburse ordinary commuting expenses (because the employed temps had series of job-by-job contracts, and not continuing contracts of employment), that Reed should have accounted for tax and NICs on the allowances throughout the relevant period and that the assessments and determinations were, in principle, correctly made."

Extreme disappointment

After the decision, Reed expressed its 'extreme disappointment', said that it intended to continue pursuing the issue and disputed the figures put forward by HMRC.

A spokesman for Reed told UKTECH: "We are extremely disappointed with the decision taken by the tax tribunal and we will be appealing. The case raises a number of highly complex legal issues and it has taken over nine months for this decision to be reached.

"In addition to the appeal we will continue to pursue our claim for a judicial review over what we consider to be unfair treatment by the Revenue.

"We would like to clarify that this is a dispute between HMRC and Reed and this case does not have an impact on temporary workers past or present. There has also been no decision taken on the size of the claim, and Reed disputes the figure proposed by HMRC."

Risk mitigation

The decision prompted Parasol, umbrella specialists, to call on service providers in the staffing industry to 'step up and provide true risk mitigation solutions in order to protect recruitment businesses'.

Rob Crossland, Chief Executive of the Parasol group of companies, said: "There is a very fine line between profitability and business failure in the staffing industry and heavy fines and penalties as a result of a tribunal decision going against you can be catastrophic. This affects not only the individual staffing business and their employees but also their clients, the workers they place, and can create negative publicity for our industry as a whole.

"The first lesson to take from recent tribunals is that recruitment businesses are not always best positioned to manage temporary worker remuneration on their own. Their specialism is recruitment and they have the expertise and experience to do this well. They then have the opportunity to partner with an employment services provider to make sure that the workers are managed and paid correctly and compliantly with no impact on their own profitability. Recent tribunal judgements should be a warning to recruitment businesses looking to manage temporary workers in-house that engaging with a specialist service provider is the least risky road to take.

"Selecting the right service provider is the next challenge. In a lot of the cases I see where an employment solutions business has been engaged, the service providers are noticeable by their absence. Ultimately, a lot of the responsibility should lie with them. What advice were they giving? How were they helping their staffing industry partner to mitigate the risks associated with the placement of temporary labour?

"Correctly structured service providers will have a full contract of employment in place, for all of their temporary workers and contractors, which has been tried and tested at tribunal and stood up to scrutiny. Expense dispensations are simply a way of reducing administrative burden, not a marketing tool and should be applied accordingly and salary sacrifice arrangements should be avoided altogether.

"Correctly structured service providers and employment solutions should always ensure that receipts are retained for worker expenses by the worker in case of HMRC inspection and that claims are only made for legitimate expenses at the precise amount of the expense incurred. There are no work-arounds and no exceptions. It's just not worth the risk."

For further information on the tribunal, see: Reed Employment plc (and others) v HM Revenue and Customs. - Baili