Reed Employment Plc v. HM Revenue and Customs: Tax Treatment of Travel Allowances for Temporary Employees Established

Introduction

Reed Employment Plc & Ors v. Revenue And Customs ([2014] UKUT 160 (TCC)) is a pivotal case adjudicated by the Upper Tribunal (Tax and Chancery Chamber) on April 9, 2014. The case primarily concerns the tax treatment of travel and subsistence allowances provided to temporary employees, known as Employed Temps, by Reed Employment Plc.

Reed Employment Plc, a prominent employment agency, implemented two successive schemes, the Reed Travel Allowance (RTA) and the Reed Travel Benefit (RTB), aimed at reimbursing their temporary employees for travel expenses. These schemes were designed to adjust the employees' gross pay to account for travel costs, with Reed seeking dispensations under the Income Tax (Earnings and Pensions) Act 2003 (ITEPA) Section 65 to render these allowances non-taxable.

The central issues addressed in this case include:

Whether the allowances constituted earnings under ITEPA Part 3 Chapter 1 and are thus taxable.
Whether the allowances fall under ITEPA Part 3 Chapter 3, treating them as deductible expenses.
The classification of the Employed Temps' workplaces as permanent or temporary, influencing the deductibility of travel expenses.
The applicability and legality of the dispensations granted by HMRC under ITEPA Section 65.
Whether Reed had a legitimate expectation that the allowances would remain non-taxable and that dispensations would not be revoked.

Reed challenged a decision by the First-tier Tribunal (Tax Chamber), which had dismissed their appeals and assessed them for approximately £158 million in unpaid income tax and National Insurance Contributions (NICs). Reed's subsequent application for judicial review was also dismissed by the Upper Tribunal.

Summary of the Judgment

The Upper Tribunal upheld the First-tier Tribunal's decision, thereby affirming Reed Employment Plc's liability for unpaid income tax and NICs on the travel and subsistence allowances paid to their Employed Temps. The Tribunal's key findings include:

The RTA and RTB schemes did not constitute an effective salary sacrifice, meaning the allowances could not be treated as non-taxable earnings under ITEPA Part 3 Chapter 3.
The workplaces to which Employed Temps traveled were deemed permanent, classifying the travel expenses as ordinary commuting costs, which are not deductible from taxable earnings.
The dispensations sought under ITEPA Section 65 were only applicable to specific listed provisions and could not be extended to Chapter 1 earnings.
Reed had no legitimate expectation that the allowances would remain non-taxable or that dispensations would be irrevocably maintained.

Consequently, Reed was required to make PAYE (Pay As You Earn) deductions in respect of the allowances, and the appeal, along with the judicial review application, was dismissed.

Analysis

Precedents Cited

The judgment extensively references key legal precedents that shape the understanding of employment contracts and tax liability for allowances:

Heaton v Bell: Established that reimbursements for travel expenses incurred in the performance of employment duties do not constitute taxable earnings if properly structured.
Pook v Owen: Clarified that travel between two places of employment can be deductible as it is performance-related, distinguishing it from ordinary commuting.
Nethermere (St Neots) Limited v. Gardiner: Emphasized the necessity of mutual obligations in employment contracts.
Carmichael v National Power PLC: Addressed the continuity of employment and mutual obligations within overarching contracts covering multiple assignments.
James v. Greenwich LBC, Troutbeck SA v. White, and others: These cases further delineate the boundaries between contractual terms and statutory employment protections.

These precedents were instrumental in the Tribunal's evaluation of whether Reed's schemes effectively altered the contractual wage arrangements of the Employed Temps and whether the allowances could be legitimately treated as deductible expenses or non-taxable earnings.

Legal Reasoning

The Tribunal's legal reasoning focused on several core aspects:

Salary Sacrifice Effectiveness: The Tribunal determined that the RTA and RTB schemes did not create a genuine salary sacrifice arrangement. Instead of reducing the Employed Temps' contractual wage with a proportionate reimbursement for expenses, the schemes merely reallocated the tax and NICs liabilities without an actual reduction in agreed pay.
Classification of Workplaces: By classifying the Employed Temps' workplaces as permanent, the Tribunal concluded that their travel expenses were ordinary commuting costs. Under ITEPA Section 338(2), such expenses are not deductible, reinforcing their classification as Chapter 1 earnings subject to tax.
Dispensations under ITEPA Section 65: The Tribunal analyzed the scope of dispensations and affirmed that they apply only to listed provisions, not to Chapter 1 earnings. Therefore, dispensations could not be extended to cover the allowances identified as taxable under Chapter 1.
Legitimate Expectation: Reed's argument hinged on the notion that they had a legitimate expectation based on HMRC's dispensations that the allowances would remain non-taxable. However, the Tribunal found insufficient grounds for this expectation, citing a lack of comprehensive disclosure and the inherent risk of dispensation revocation.

The Tribunal meticulously dissected the contractual language and operational mechanics of the RTA and RTB schemes, finding that the intentions behind the schemes did not align with the statutory requirements for tax exemption.

Impact

This judgment has significant implications for employers and tax practitioners:

Tax Treatment of Allowances: Clarifies that travel and subsistence allowances provided to temporary employees must be carefully structured to qualify for non-taxable treatment. Simply reallocating tax liabilities without actual salary adjustments does not suffice.
Employment Contract Structures: Underscores the importance of clear contractual agreements when implementing salary sacrifice schemes. Employers must ensure that contractual wage reductions are genuine and reflect a bona fide sacrifice in exchange for non-taxable benefits.
Dispensation Application: Highlights the limited scope of dispensations under ITEPA Section 65, emphasizing that they cannot be broadly applied to cover earnings outside listed provisions.
Legitimate Expectation Doctrine: Reinforces that legitimate expectations based on partial or inadequate disclosures do not hold sway in tax adjudications. Employers must provide comprehensive and transparent information when seeking tax dispensations.

Future cases involving similar schemes will reference this judgment to ensure compliance with tax laws and to avoid substantial liabilities.

Complex Concepts Simplified

Understanding the legal intricacies in this case requires clarity on several concepts:

Salary Sacrifice: A practice where an employee agrees to a reduction in their contractual salary in exchange for a non-cash benefit, such as pension contributions or travel allowances. For it to be effective, there must be a genuine reduction in salary that is offset by the benefit, thereby altering the taxable income.
ITEPA Chapter 1 vs. Chapter 3 Earnings:
- Chapter 1 covers general and specific earnings, including salary and wages, which are subject to income tax and NICs.
- Chapter 3 pertains to deductible expenses provided to employees, such as travel and subsistence, which can be exempt from tax if properly reimbursed.
Dispensations under ITEPA Section 65: Special exemptions granted by HMRC that allow certain payments or benefits to be non-taxable. These dispensations are limited to specified provisions and require HMRC's satisfaction that no additional tax liabilities arise.
Legitimate Expectation: A legal principle where a taxpayer reasonably expects certain treatment based on representations or past practices by HMRC. However, this expectation must be clear, unambiguous, and based on comprehensive disclosure.

Properly navigating these concepts is essential for employers seeking tax-efficient remuneration arrangements for their employees.

Conclusion

The Upper Tribunal's judgment in Reed Employment Plc v. HM Revenue and Customs underscores the critical importance of structuring employee allowances in compliance with tax legislation. The Tribunal affirmed that Reed's RTA and RTB schemes did not constitute effective salary sacrifice arrangements, leading to the classification of allowances as taxable earnings under ITEPA Chapter 1. Consequently, Reed was mandated to fulfill PAYE obligations for these allowances, reinforcing the boundaries within which dispensations operate.

This case serves as a definitive guide for employers in designing remuneration schemes, emphasizing the necessity of genuine salary adjustments and thorough disclosure to HMRC. It also clarifies the limited scope of dispensations, ensuring that only specified provisions can be exempted from taxation. The ruling further delineates the parameters of legitimate expectation, highlighting that partial or insufficient disclosures do not afford protection against tax liabilities.

Overall, Reed Employment Plc v. HM Revenue and Customs is a landmark decision that shapes the interplay between employment contracts, tax law, and employer practices in the provision of employee benefits.