Mainpay Ltd v HMRC: No “Single Discontinuous Employment” under ITEPA and a Clarified Causation Test for “Loss of Tax Brought About Carelessly”

Introduction

This appeal concerned umbrella company arrangements and the tax treatment of travel and subsistence reimbursements for temporary workers. Mainpay Ltd, an umbrella company operating mainly across education, health and social care, challenged HMRC determinations under PAYE and NIC legislation denying the deductibility of subsistence expenses and invoking extended time limits for earlier years on the basis that any loss of tax was “brought about carelessly”.

The core dispute had three layers:

Ground 1 – whether workers engaged under a single umbrella contract could be treated, for ITEPA 2003 purposes, as having a “single employment” spanning discontinuous assignments (even though there was no overarching contract of employment covering the gaps).
Ground 2 – only if Ground 1 succeeded, whether in principle an employer could use reasonable estimates/benchmark rates for subsistence without a dispensation, where some expenditure was in fact incurred.
Ground 3 – whether the First-tier Tribunal (F-tT) and Upper Tribunal (UT) applied the correct causation test in upholding assessments beyond the ordinary four-year time limit on the basis that any loss of tax was “brought about carelessly” under the Taxes Management Act 1970 (TMA) ss.29, 36 and 118(5), and whether HMRC’s pleading on causation was adequate.

The F-tT dismissed Mainpay’s appeal. The UT upheld that decision. The Court of Appeal unanimously dismissed Mainpay’s appeal on Grounds 1 and 3, and declined to decide Ground 2 as academic.

Summary of the Judgment

The Court of Appeal (Civil Division) dismissed Mainpay’s appeal:

Ground 1 (single discontinuous employment): Dismissed. The court rejected the proposition that a single, continuous umbrella contract that is not an overarching contract of employment can nonetheless constitute “a single employment” for ITEPA purposes across discontinuous assignments. Employment exists intermittently—only during assignments when a contract of service operates; the gaps are non-employment periods. Consequently, each assignment is a separate employment, with the assignment location being a permanent workplace for that employment. The F-tT and UT were correct.
Ground 2 (use of estimates/benchmark rates without dispensation): Not determined. Because Ground 1 failed, the question did not arise. The Court of Appeal expressed no view, though the F-tT had held there was no automatic entitlement to use benchmark rates without a dispensation and had grave doubts the arrangements genuinely reimbursed expenses actually incurred.
Ground 3 (causation and carelessness): Dismissed. The court confirmed that “brought about carelessly” requires a causal connection between the taxpayer’s carelessness and the loss of tax (s.36 uses “brought about”, which the court equated with “caused”; s.118(5) defines “carelessly” and does not dilute causation). HMRC must establish a connection, but need not prove a precise counterfactual sequence of events or that a particular remedial step would definitively have been taken. On the facts, the F-tT properly found that failure to take reasonable care (not obtaining appropriate tax advice on the overarching contract point) brought about the loss. The pleading was adequate.

Detailed Analysis

Statutory framework engaged

TMA 1970 s.29 (discovery assessments): permits assessments where income that ought to have been assessed was not; constrained by conditions including that the situation was “brought about carelessly or deliberately” (s.29(4)-(5)).
TMA 1970 s.34: ordinary four-year time limit for assessments.
TMA 1970 s.36: extends time limits to six years where the loss of tax was “brought about carelessly”, and to 20 years in cases of deliberate conduct.
TMA 1970 s.118(5): defines carelessness for the purposes of the Act as failing to take reasonable care to avoid bringing about the loss or situation.
ITEPA 2003 s.4: defines “employment” for the employment income Parts; focuses on employment under a contract of service (among others).
ITEPA 2003 ss.338–339: travel for necessary attendance; definitions of “workplace”, “permanent workplace” and “temporary workplace”. No deduction for ordinary commuting to a permanent workplace; deductibility generally turns on whether a place is a temporary workplace in relation to the duties of “the employment”.
PAYE Reg 80 determinations and decisions under s.8 Social Security Contributions (Transfer of Functions) Act 1999: the vehicles for HMRC’s assessments of under-deducted PAYE and NICs.

Precedents and authorities considered

The Court’s reasoning sits squarely within well-established principles on contractual classification and the definition of “employment” in common law and tax contexts. The judgment traverses and applies the following authorities:

Street v Mountford [1985] AC 809: Labels do not govern legal classification. The court looks to the substance and legal effect of the rights and obligations, not the parties’ description. This principle underpins the rejection of Mainpay’s contention that a single contract necessarily maps to a single employment (para 101).
Ready Mixed Concrete (South East) Ltd v Minister of Pensions [1968] QB 497: Classic exposition of the “irreducible minimum” for a contract of service (including control). The F-tT did not need to resolve control across the gaps because it found the essential mutuality was absent between assignments (para 45).
Reed Employment v HMRC [2014] UKUT 160 (TCC): The only authority to squarely brush aside the “single discontinuous employment” argument. Both F-tT and UT relied on Reed in rejecting the idea that a framework umbrella agreement elides successive contracts of employment into a single “employment” absent an overarching contract (paras 45, 52, 75).
Quashie v Stringfellow Restaurants Ltd [2012] EWCA Civ 1735; [2013] IRLR 99: Recognises that workers can be employed under successive contracts for successive engagements (para 51). Supports the F-tT’s treatment of each assignment as a separate employment.
PGMOL v HMRC [2021] EWCA Civ 1370; [2024] UKSC 29: Affirms that the existence of a contract of employment is a question of common law classification, substance over form. The UT noted it would be surprising if Mainpay’s single employment thesis were correct and not raised in authorities up to and including PGMOL (para 75).
Arnold v Britton [2015] UKSC 36; [2015] AC 1619: Clear contractual language cannot be overridden by a tribunal’s view of “reality” (FTT was “bound” by text where unambiguous), although the F-tT could still assess mutuality based on the parties’ rights and obligations (para 46).
Nethermere (St Neots) Ltd v Gardiner [1984] ICR 612; Cotswold Developments Construction Ltd v Williams [2006] IRLR 181; ABC New Intercontinental Inc v Gizbert [2006] All ER (D) 243 (Jan): Authorities underscoring the centrality of mutuality of obligation; an unfettered right to refuse work undermines the existence of a contract of employment during the relevant period (para 45).
Atherton v HMRC [2019] UKUT 41 (TCC) and Bella Figura v HMRC [2020] UKUT 120 (TCC): UT authorities addressing carelessness and causation that the UT in this case reconciled by requiring a “connection” between carelessness and loss but not a precise counterfactual proof (paras 85–88).
R (PACCAR) v Competition Appeal Tribunal [2023] UKSC 675; [2023] 1 WLR 2594: Cited to support interpretative practice that the ordinary meaning of the defined phrase can inform the definition’s scope (para 108), reinforcing that “brought about” naturally connotes causation.

Legal reasoning: Ground 1 (the “single discontinuous employment” theory)

Mainpay advanced a novel proposition: where all assignments are governed by a single umbrella contract (which is not an overarching contract of employment), the entirety of the engagement constitutes one “employment” for ITEPA purposes, notwithstanding gaps between assignments. This matters because ITEPA ss.338–339 determine whether a workplace is permanent or temporary by reference to the duties of “the employment”; if there is only one employment spanning all assignments, many assignment sites may be temporary workplaces and travel/subsistence could be deductible.

The court rejected this theory for principled and textual reasons:

Classification is by legal effect, not label. Even if there is one overarching contract in form, its legal character can vary over time. Here, the F-tT found that during assignments the legal relationship amounted to a contract of employment; between assignments it did not. There is therefore no continuous contract of employment during the gaps (para 102).
ITEPA s.4 ties “employment” in the relevant Parts to a contract of service. Where the umbrella contract is better understood as a framework agreement, the “employment” arises only when a specific assignment gives rise to a contract of service. It follows that each assignment is a separate employment (paras 52–53).
Mutuality of obligation is absent between assignments. The F-tT identified that workers’ only obligation was to “consider” assignments; they retained an unfettered right to refuse. On the authorities, such an unfettered right is inconsistent with mutuality and therefore with a contract of employment during gaps (paras 45, 47).
The argument’s absence from the case law (including PGMOL and Reed) tells against it. The UT noted that if the thesis had merit, it would be surprising it had not surfaced in litigation on analogous arrangements (para 75).

Consequence: If there is no overarching contract of employment, each assignment is a separate employment. In relation to those separate employments, the assignment workplace is a permanent workplace for that employment, so travel and subsistence are ordinary commuting costs and non-deductible under ITEPA s.338(2)–(3). That conclusion disposed of Ground 1 and rendered Ground 2 academic.

Legal reasoning: Ground 3 (what does “brought about carelessly” require?)

The Court of Appeal settled the causation standard for extended time limits under TMA s.36(1) and the definition in s.118(5):

There is a causal requirement. The phrase “brought about” in s.36(1) and s.29(4) is synonymous with “caused”; s.118(5) defines “carelessly” but does not dilute or displace causation (paras 105–108).
HMRC must prove a connection between carelessness and the loss of tax. It is not enough to show carelessness and a loss standing alone; the carelessness must be a failure to take reasonable care to avoid bringing about that loss (paras 86–88, 114–115).
No requirement to prove a precise counterfactual. HMRC need not establish, on the balance of probabilities, the exact steps the taxpayer would have taken or the precise alternative outcome had reasonable care been taken (paras 87, 89, 117). Instead, HMRC should show what the taxpayer should have done differently (e.g., seek appropriate tax advice on the overarching contract point) and a sufficient connection to the resulting loss.
Burden and evidential dynamics. HMRC bears the legal burden to establish carelessness and the requisite connection to the loss. Once HMRC does “enough,” the evidential burden can shift to the taxpayer to rebut the connection or demonstrate reasonable care (para 118).
Application to the facts. The F-tT found that Mainpay unreasonably relied on a “vague assurance” from employment lawyers who lacked the necessary tax facts and expertise, while not obtaining targeted tax advice on the pivotal question: whether its arrangements achieved an overarching contract of employment essential to the claimed deductions. That failure brought about the loss of tax, because Mainpay then operated the scheme as if the expenses were deductible when they were not (paras 113–116).
Pleading adequacy. The F-tT and UT were entitled to treat HMRC’s statement of case, read as a whole, as sufficiently raising the carelessness-and-causation case. Such pleading evaluation is akin to a case management decision and attracts appellate restraint; no error was shown (paras 119–120).

The court’s approach reconciles the UT’s earlier decisions (Atherton, Bella Figura) by insisting on a causal connection yet rejecting a mechanistic “but-for counterfactual proof” requirement. It also aligns with ordinary statutory interpretation, reading “brought about” in ss.29 and 36 consistently and using s.118(5) to define carelessness, not reframe causation (with PACCAR confirming interpretive method).

Ground 2 (estimation/benchmark rates without dispensation) — not determined

Because Ground 1 failed, the Court of Appeal did not rule on estimation or benchmark scales. The F-tT (and UT) had taken the view that benchmark subsistence rates could only be used with a HMRC dispensation and where expenses were actually incurred—mirroring HMRC Brief 24/09—and expressed serious reservations that Mainpay’s arrangements genuinely reimbursed actual expenditure given automatic portal defaults, the absence of receipts, and the high take-up rate. Those points remain influential but are not elevated to Court of Appeal authority in this judgment.

Impact and implications

For umbrella companies and agencies

No “single discontinuous employment” workaround: If there is no overarching contract of employment covering the gaps (i.e., no mutual obligations in downtime), each assignment is a separate employment. Attempting to treat all assignments as a single employment for travel/subsistence deductibility fails.
Workplace classification consequences: For each separate employment (assignment), the assignment location will typically be a permanent workplace under ITEPA s.339, rendering commuting costs non-deductible and undermining travel/subsistence schemes predicated on “temporary workplace” status.
Contract architecture matters: A framework umbrella agreement does not, without more, create a tax-effective overarching employment. Clauses that only oblige workers to “consider” assignments, with unfettered refusal rights, will usually defeat mutuality of obligation in the gaps.
Advice risk management: Reliance on non-tax specialists for tax-sensitive scheme design can constitute carelessness. Where reimbursement schemes hinge on technical employment tax concepts, targeted tax advice—on the specific contractual mechanics and deductibility conditions—is essential.

For litigation and HMRC assessments

Causation standard clarified: “Brought about carelessly” entails a causal connection but not a forced, granular counterfactual narrative. HMRC must show what the taxpayer should have done differently and how the failure connected to the loss, but need not prove the precise remedial step that would, more likely than not, have been taken.
Pleadings: While particulars of causation remain important, tribunals may adopt a pragmatic, purposive view of pleadings read as a whole. Taxpayers should seek further particulars where needed; otherwise, appellate intervention on pleading adequacy is unlikely.
Evidence strategy: Once HMRC has done “enough,” the evidential burden may implicitly shift. Taxpayers asserting that reasonable care was taken (or that loss would have occurred anyway) should adduce concrete evidence—ideally contemporaneous advice, documents, and governance records.

On travel and subsistence practices

Benchmark rates: Though not decided, the F-tT’s approach—requiring both actual incurrence and, historically, a dispensation (as per HMRC Brief 24/09)—continues to reflect HMRC’s expectations for subsistence reimbursements. Automatic round-sum payments without evidencing expenditure remain high-risk.
System design: Default “opt-out” portals making automatic claims without receipts invite scrutiny on whether reimbursements are genuine. Employers should design controls that require positive claims supported by evidence or robust checking procedures.
Documentation: Clear worker communications, receipt-keeping policies, and audit trails are essential to sustain any claim that reimbursements reflect actual expenses.

Complex concepts simplified

Overarching contract of employment: A single, continuous contract of employment that spans multiple assignments and the gaps between them. Requires mutual obligations during the gaps (e.g., an obligation to provide and accept work); control is relevant during performance but mutuality is often decisive for the gaps.
Framework agreement: A contractual scaffold setting terms for future engagements. It can coexist with separate contracts of employment that arise only when each specific assignment begins. Between assignments, there may be no employment at all.
Mutuality of obligation: The “you must offer work; I must accept (or be available for) work” core of an employment relationship during the relevant period. An unfettered right to refuse assignments typically negates mutuality during gaps.
Permanent vs temporary workplace (ITEPA ss.338–339): A permanent workplace is one the employee regularly attends in performing the duties of the employment. Travel to a permanent workplace is ordinary commuting and non-deductible. A temporary workplace is attended for tasks of limited duration or a temporary purpose; travel can be deductible, subject to statutory carve-outs (e.g., 24-month rule).
“Brought about carelessly” (TMA ss.29, 36, 118(5)): Extended time limits (six years) apply if the loss of tax was caused by carelessness—defined as failing to take reasonable care to avoid that loss. HMRC must prove a connection between the failure and the loss, but not a precise alternative history of what would have happened otherwise.
Dispensation and benchmark rates: Historically, employers could agree benchmark subsistence rates with HMRC (via dispensation), provided expenses were actually incurred. Without dispensation, reimbursements generally require evidencing actual expenditure to be tax-free.
Discovery assessments (TMA s.29): Allow HMRC to assess underpaid tax if they “discover” that income should have been assessed but was not, subject to restrictions and conditions, including carelessness/deliberateness or insufficiency of available information.

Conclusion

Mainpay delivers two important clarifications at Court of Appeal level.

On ITEPA “employment”: The court definitively rebuts the “single discontinuous employment” theory. Where there is no overarching contract of employment, an umbrella framework arrangement cannot be recharacterised as a single employment for tax purposes. Employment arises only during assignments (separate employments); the workplace classification and travel/subsistence consequences follow.
On TMA causation: “Brought about carelessly” includes a real causal requirement—carelessness must cause the loss of tax—but HMRC need not establish an exact counterfactual narrative. It suffices to show what the taxpayer should have done differently to avoid the loss and a sufficient connection between that failure and the under-assessment.

Practically, umbrella companies should re-examine contract structures, worker engagement mechanics, and expense reimbursement controls. From a disputes perspective, both HMRC and taxpayers should calibrate their approach to carelessness and causation: HMRC must evidence a connection; taxpayers should be prepared to demonstrate the reasonable care they actually took and how any alleged lapse did not cause the underpayment.

The appeal was dismissed. Lord Justice Arnold and Lady Justice King agreed.