In the latest round of the UK’s most prominent tax grudge match, the Reed Group lost a first tier tribunal appeal against HM Revenue & Customs' decision to revoke an expenses dispensation for its temps after eight years.
Faced with a potential tax bill of £158m, the recruitment agency has called for a judicial review of its treatment by the tax department.
The multi-year, multi-strand appeal rests on fundamental questions about the employment status of the company’s temporary workers, whether it was entitled to a dispensation for their expenses and the nature of the salary sacrifice scheme under which it repaid the staff a portion of the tax saved.
The tribunal heard that as many as 500,000 workers participated in the Reed travel allowance schemes during 1998-2006. The overall amount of HMRC’s assessment, including interest, is in the region of £158m. Reed is unlikely to recover anything if it loses its appeals.
Case outline
Having decided to make temps on its books employees within several of its staffing agency subsidiaries in 1998, Reed’s operations director Derek Beal, a chartered accountant, was advised by Robson Rhodes that it might be able to take advantage of a relaxation in the rules on travel and subsistence expenses to allow them to participate in a salary sacrifice scheme.
If they opted to join the Reed travel allowance scheme, employees would receive a lower level of gross pay, but would gain through a tax-free scale payment based on where they worked and how they got there. The arrangement also saved Reed considerable sums in income tax and NICs.
Having gained an HMRC dispensation to start the scheme in 1998, and subsequent renewals based on higher scale rates, Reed’s argued that the allowances were only paid to employees travelling to temporary engagements to reflect their tax-deductible expenses; the payments were not earnings and so not subject to income tax (or NICs).
Partly because of the number of calls its staff were fielding from Reed employees about the scheme, HMRC officials grew increasingly wary of Reed’s arrangement, the amounts being paid out and the employment status of recipients and revoked the fourth version of dispensation in April 2006.
Before the tribunal, HMRC’s barristers argued that the travel allowances were not paid out for deductible expenses, but were in fact part of the employed temps’ salary. In the view of HMRC officials, the company’s temp workers did enjoy continuity between assignments, but were only employed for the duration of each assignment.
Since they amounted to permanent workplaces for the duration of the engagement, ordinary commuting costs were not deductible.
The employee’s status was the crux on which the tribunal’s ruling ultimately turned, but the judges’ stance was not helped by the reluctance of Reed and Robson Rhodes to divulge discuss openly how the dispensations were being applied, nor by the lack of clarity in staff guidelines, which were examined in great details during the tribunal process.
It emerged from an email presented as evidence when the dispensation was first sought back in 1998, Robson Rhodes tax partner Helen Riley expressed “some qualms about the issue, in terms of lack of disclosure to the Revenue”.
The judges concluded: “The evidence made it clear to us that Reed, and RR on its behalf, were throughout at pains to say as little as they could to HMRC of the manner in which Reed was applying the dispensations.”
The Reed and Robson Rhodes staff involved in setting up the travel allowance scheme all seemed to find it difficult to describe the schemes for what they were: “a device by which Reed exploited the potential for its employed temps to obtain tax relief for their travelling and subsistence expenses, not in order to enhance their earnings, but for its own benefit.”
The decision
On the basis of the substantial evidence presented, the judges highlighted the following key issues:
- Did the employed temps make an effective salary sacrifice?
No. “Far from providing a benefit to the employed temp, [Reed] appropriated a significant part of the saving to itself; and the supposed sacrifice, however it was presented, was no more than an arithmetical adjustment whose purpose was to ensure that Reed secured the intended share of the benefit. It was not, in our view, a sacrifice in the true sense of that word.” - Were the disputed allowances within Chapter 1 or Chapter 3
A score draw. The judgment on this point favoured Reed’s interpretation that the allowances were Class 3 emoluments that could be covered by a dispensation, but this was secondary to the workers’ employement status. If their workplaces were permanent, the allowances would be taxable as earnings under Chapter 1. - Were the workplaces temporary or permanent?
Reed did have a contract of employment with its temporary agency staff, but this did not satisfy the judges that it extended to the periods after particular assignments had ended. In their view, Reed’s obligation was to try and find opportunities to work, which temps could decline. Reed exercised no control over the temps when they were not on assignment and the contracts lacked provisions that would merit them being accepted as contracts of service. “While we accept that there was a contract of some sort when the employed temp was not on an assignment, it was not a contract of employment,” they concluded. - Did the dispensations cover the allowances?
“The short answer to this question is ‘no’ since, as we have determined, the allowances fell within Chapter 1 and could therefore never be covered by a dispensation.”
The tribunal is clear enough on the employment status and tax determination, but the case has already been the focus a request from Reed for a judicial review of HMRC’s decision to revoke the dispensations retrospectively without uncovering any material misrepresentations (despite the evasiveness noted by the first-tier judges, Reed was not found to have misrepresented the nature of its travel scheme to HMRC).
The tax department's actions breached Reed's legitimate expectation that it could proceed with the scheme based on HMRC's dispensation. In an internal email in 2006, HMRC official David Stephens commented the department could have "cocked-up" by agreeing at the time with Reed's assessment of its employees' status.
"Under administrative law Reed could have a viable claim against us if, having put all their cards face upwards on the table, they acted on our ruling," he wrote.
Reed also challenged the lower tribunal’s jurisdiction over the case. In November 2010 an upper tier tribunal decided that the ongoing judicial review proceedings should be stayed until after the first tier tribunal came to a decision about the tax appeals. Much of this ground is summarised in the first-tier tribunal decision, but will be revisited when the judicial review gets under way.
Following the first-tier tribunl decision, Reed issued a statement expressing disappointment with the tribunal decision, which it would 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,” the company said. “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."
It continued: "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.”
While the expenses case chugged on, Reed last year won a tribunal appeal challenging HMRC’s stance on the VAT that is charged to the company’s clients. The tribunal ruled that Reed was right to charge VAT only on the commission element of its charges to clients, and not the full amount invoiced.
An earlier case involving Hays went the other way and because first-tier tribunals are not binding, HMRC issued guidance explaining that the Reed VAT ruling did not have any wider impact.
With the aggregate scores level, it’s even money whether the judicial erview will bring an end to this long-running legal feud.
