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Reed Employment Plc & Ors v Revenue And Customs
Factual and Procedural Background
The appellants, collectively referred to as "Company A", operate an employment agency and business supplying temporary workers ("Employed Temps") to clients. The dispute concerns two successive travel and subsistence expense reimbursement schemes ("Schemes") introduced by Company A between 1998 and 2006, designed to take advantage of tax law changes under the Income Tax (Earnings and Pensions) Act 2003 ("ITEPA"). Company A contended that payments made under the Schemes to Employed Temps were non-taxable reimbursements of travel expenses under ITEPA Part 3 Chapter 3, supported by dispensations granted by HM Revenue and Customs ("HMRC").
HMRC challenged this, asserting the payments were earnings under ITEPA Part 3 Chapter 1 and thus taxable, with Company A liable for unpaid income tax and National Insurance Contributions ("NICs") totaling approximately £158 million. Company A appealed determinations and notices of decision issued by HMRC and applied for judicial review of those determinations. The First-tier Tribunal ("FTT") dismissed Company A's appeals and judicial review application. Company A now appeals to the Upper Tribunal ("UT").
Legal Issues Presented
- Whether the Employed Temps made an effective salary sacrifice under the Schemes, resulting in reduced salary plus separate payments for travel expenses.
- Whether the disputed allowances are earnings under ITEPA Part 3 Chapter 1 or sums treated as earnings under Chapter 3.
- Whether the Employed Temps traveled to temporary or permanent workplaces for the purposes of sections 338 and 339 of ITEPA.
- Whether HMRC inspectors could lawfully grant dispensations under section 65 of ITEPA in respect of the disputed payments.
- Whether the dispensations granted covered the disputed payments.
- The legal effect of the dispensations on the obligation to deduct tax under PAYE and on the charge to income tax.
- Whether Company A had a substantive legitimate expectation that the allowances would not be subject to income tax and NICs, that dispensations would not be revoked retrospectively, and that HMRC would not seek retrospective tax or NICs.
- Whether Company A was under an obligation as employers to make PAYE deductions in respect of the allowances during the relevant period.
- Whether the outcome for NICs follows the outcome for income tax.
Arguments of the Parties
Appellant's Arguments
- Company A contended that the Schemes operated by way of a genuine salary sacrifice, whereby Employed Temps agreed to reduce their salary in return for separate, non-taxable reimbursements of travel expenses, supported by dispensations from HMRC.
- Company A submitted that the disputed allowances were not earnings under Chapter 1 of ITEPA but were reimbursements of expenses under Chapter 3, which should be exempt from tax and NICs under the dispensations.
- Company A argued that the Employed Temps traveled to temporary workplaces, making travel expenses deductible under ITEPA.
- Company A asserted that HMRC lawfully granted dispensations which should be binding and that Company A had a legitimate expectation based on those dispensations that the allowances would not be taxed or subject to NICs, nor would dispensations be revoked retrospectively.
- Company A sought permission to amend its case to rely on legitimate expectation arguments and to challenge the effectiveness of opt-out rights and cash-for-cash arrangements.
Respondent's Arguments
- HMRC contended that the disputed allowances were earnings under Chapter 1 of ITEPA, representing ordinary commuting expenses to permanent workplaces, and thus taxable.
- HMRC submitted that there was no effective salary sacrifice, as the contractual hourly rate was not reduced and the arrangements were a re-labelling of salary as expenses.
- HMRC argued that the Employed Temps traveled to permanent workplaces, as each assignment constituted a separate contract of employment, with no overarching contract covering gaps between assignments.
- HMRC maintained that dispensations could only apply to payments chargeable under the listed provisions of Chapter 3, and as the disputed allowances were Chapter 1 earnings, dispensations did not apply.
- HMRC denied that Company A had a legitimate expectation that the allowances would not be taxed or that dispensations would not be revoked retrospectively, emphasizing the need for full disclosure and HMRC's statutory powers.
- HMRC opposed the application to amend the case and submitted the First-tier Tribunal lacked jurisdiction to hear legitimate expectation claims.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Heaton v Bell [1970] AC 728 | Interpretation of employment contract and salary sacrifice; re-labelling salary as expenses insufficient to change taxable earnings. | Applied to conclude no effective salary sacrifice; contractual hourly rate unchanged; payments were re-labelling of salary. |
| Pook v Owen [1970] AC 244 | Deductibility of travel expenses between two places of work; travel expenses incurred in performance of duties deductible. | Held travel between two workplaces deductible; distinguished from ordinary commuting expenses; supported finding that Employed Temps traveled to permanent workplaces. |
| Taylor v Provan [1974] STC 168 | Confirmed Pook v Owen principle; dual workplace concept for travel expense deductibility. | Applied to affirm that travel between two places of work is deductible; supported HMRC's position. |
| Edwards v Bairstow [1956] AC 14 | Standard for appellate review of factual findings; findings unsupported by evidence or unreasonable may be overturned. | Applied to assess whether FTT's factual findings were sustainable; upheld most findings as reasonable. |
| R v IRC ex p MFK Underwriting Agents [1990] 1 WLR 1545 | Doctrine of legitimate expectation; fairness requires public authority to act consistently with clear representations. | Applied to assess whether Company A had legitimate expectation based on dispensations and full disclosure. |
| Gisda Cyf v Barrett [2010] UKSC 41 | Distinction between contractual rights and statutory rights; relevance to employment status and continuity. | Applied to distinguish contractual employment for tax purposes from statutory employment rights. |
| Carmichael v National Power PLC [1999] AC 1226 | Contractual intention and terms may be ascertained from documents and conduct; not solely from written contract. | Applied to consider incorporation of Scheme terms into contracts and overall contractual relationship. |
| Nethermere (St Neots) Ltd v Gardiner [1984] ICR 612 | Test for contract of employment: mutuality of obligation and control. | Applied to assess whether contract of employment subsisted between assignments; found no mutuality during gaps. |
| Stevenson Jordan & Harrison Ltd v MacDonald & Evans [1952] 1 TLR 101 | Mutuality of obligation and control as essential elements of employment contract. | Applied as part of test for employment contract existence throughout assignments. |
| Edwards v Bairstow [1956] AC 14 | Standard for appellate review of factual findings. | Applied to reject appellant's challenges to factual findings as unsupported or unreasonable. |
| Markem Corp v Zipher Ltd [2005] EWCA Civ 267 | Tribunal cannot disbelieve unchallenged evidence without opportunity for explanation. | Applied to uphold unchallenged witness evidence before FTT. |
| R (Bancoult) v Secretary of State for Foreign and Commonwealth Affairs (No 2) [2009] AC 453 | Requirement for legitimate expectation to be based on clear, unambiguous, unqualified representation. | Applied in assessing clarity and scope of HMRC's dispensations. |
| R (ABCIFER) v Secretary of State for Defence [2003] QB 1397 | Interpretation of representations for legitimate expectation from the perspective of reasonable recipient. | Applied to assess reasonable understanding of HMRC's dispensations by Company A. |
| Royal National Lifeboat Institution v Bushaway [2005] IRLR 674 | Entire agreement clauses are not determinative of incorporation of handbook terms. | Applied to conclude handbook terms may be incorporated despite entire agreement clause. |
| Briscoe v Lubrizol Ltd [2002] EWCA Civ 508 | Handbooks and explanatory materials may give rise to binding contractual obligations. | Applied to support incorporation of Scheme terms into contracts. |
| Keeley v Fosroc International Ltd [2006] EWCA Civ 1277 | Provisions in handbooks may or may not be contractual depending on context and conflict with other terms. | Applied to evaluate incorporation and contractual effect of Scheme materials. |
| Cornwall County Council v Prater [2012] EWCA Civ 1291 | Mutuality of obligation must subsist throughout period for umbrella contract except where statutory continuity applies. | Applied to reject umbrella contract covering gaps between assignments absent mutuality. |
| James v Greenwich LBC [2007] ICR 577 | Mutuality of obligation must subsist during gaps for umbrella contract. | Applied to reject umbrella contract in absence of mutuality during gaps. |
| Hellyer Brothers Ltd v McLeod [1987] ICR 526 | Mutuality of obligation must subsist over entire duration to establish contract of employment. | Applied to reject umbrella contract given gaps without mutuality. |
| Clark v Oxfordshire Health Authority [1998] IRLR 125 | Mutuality of obligation must subsist in continuing arrangements outside assignments. | Applied to reject umbrella contract without mutuality during gaps. |
| Gisda Cyf v Barrett [2010] UKSC 41 | Distinction between contractual employment and statutory employment rights. | Applied to distinguish contract of employment for tax from statutory continuity. |
| R (on the application of Lower Mill Estate Ltd) v HMRC [2008] EWHC 2409 (Admin) | Full and frank disclosure required to establish legitimate expectation in tax context. | Applied to assess adequacy of Company A's disclosure to HMRC. |
| R v IRC ex p MFK Underwriting Agents [1990] 1 WLR 1545 | Legitimate expectation requires clear, unambiguous representation and full disclosure. | Applied to assess whether Company A could rely on HMRC's dispensations. |
| R (Gaines-Cooper) v HMRC [2011] UKSC 47 | Confirmed principles of legitimate expectation and importance of full disclosure. | Applied in analysis of legitimate expectation claim. |
| R (Bancoult) v Secretary of State for Foreign and Commonwealth Affairs (No 2) [2009] AC 453 | Requirement for clarity and fairness in representations inducing legitimate expectation. | Applied to assess HMRC representations. |
| Paponette v AG of Trinidad and Tobago [2010] UKPC 32 | Requirement that representations be clear and unambiguous for legitimate expectation. | Applied to assess clarity of HMRC's dispensations. |
Court's Reasoning and Analysis
The Court undertook a detailed and structured analysis of the competing legal and factual issues arising from the appeals and judicial review application. The Court carefully examined the contractual arrangements between Company A and the Employed Temps, the operation and character of the Schemes, the statutory provisions of ITEPA and related legislation, and the nature and effect of HMRC dispensations.
On Issue 1, the Court analysed whether the Employed Temps made an effective salary sacrifice. It concluded that the Schemes did not alter the contractual hourly rate, but instead amounted to a re-labelling of salary as expenses. The evidence showed no agreement by Employed Temps to accept a reduced salary in return for non-taxable expense payments. The Court applied the principles from Heaton v Bell and concluded that the contractual arrangements did not constitute an effective salary sacrifice.
On Issue 2, the Court considered whether the disputed allowances were earnings under Chapter 1 or sums treated as earnings under Chapter 3 of ITEPA. It accepted HMRC's position that payments reimbursing ordinary commuting expenses to permanent workplaces are earnings under Chapter 1. The Court rejected the appellant's argument that such payments could be Chapter 3 expenses merely because they were paid "by reason of the employment". The Court found that the statutory scheme and case law supported this distinction and that the disputed allowances were Chapter 1 earnings and taxable accordingly.
On Issue 3, the Court addressed the nature of the workplace. It held that each assignment constituted a separate contract of employment, and there was no overarching contract covering gaps between assignments. Consequently, the workplaces were permanent for the purposes of ITEPA sections 338 and 339. The Court found no mutuality of obligations during gaps and that the notion of an umbrella contract was not established.
On Issues 4, 5 and 6, the Court held that dispensations under section 65 of ITEPA could only apply to payments chargeable under the listed provisions, which exclude Chapter 1 earnings. Since the disputed allowances were Chapter 1 earnings, dispensations did not apply. Hypothetically, if the allowances were Chapter 3 earnings, dispensations would relieve the employer of PAYE obligations and remove the charge to tax, but this was not the case here.
On Issue 7, concerning legitimate expectation, the Court found that the FTT lacked jurisdiction to hear judicial review claims but considered the substantive arguments. It held that Company A did not make full and frank disclosure to HMRC of relevant facts, including the true operation of the Schemes and the extent of benefits retained by Company A. The Court found the dispensations were granted based on incomplete information and that Company A could not rely on a legitimate expectation that the allowances would not be taxed or that dispensations would not be revoked retrospectively. The Court emphasized the need for clear, unambiguous representations and full disclosure.
On Issues 8 and 9, the Court concluded that Company A was obliged to operate PAYE deductions on the disputed allowances, and the outcome for NICs followed the same reasoning.
The Court rejected Company A's numerous factual challenges to the FTT's findings, applying the high standard required for overturning factual findings on appeal. It found the FTT's findings to be supported by evidence and reasonable inferences.
Holding and Implications
The Court DISMISSED the appeals by Company A and refused permission for judicial review.
As a result, the disputed travel and subsistence allowances paid to Employed Temps were properly treated as taxable earnings under ITEPA Part 3 Chapter 1. Company A was obligated to operate PAYE deductions and account for income tax and NICs accordingly. The dispensations granted by HMRC did not apply to these payments as they were not Chapter 3 expenses. The Court found no legitimate expectation that the allowances would be exempt from tax or NICs or that dispensations would not be revoked retrospectively.
No new legal precedent was established; the decision reaffirms established principles concerning the characterisation of employment income, the limits of dispensations under tax legislation, and the requirements for legitimate expectation claims in tax disputes.
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