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Temporary workplace expense schemes under scrutiny after HMRC wins major tax case against Reed
Posted Jan 24, 2012
A landmark tax tribunal case has found a leading employment agency to be liable for £158m in back taxes, after 500,000 temps were reimbursed for expenses, which should have been paid as salary.
After a nine month court case, HMRC has won its battle against Reed Employment in a hearing which may have ramifications for umbrella companies and other employment businesses.
Salary sacrifice scheme 'manipulated'
The crux of the case revolved around the tax treatment of subsistence and travel expenses paid to staff when working at a temporary workplace. Although such expenses are allowable in many cases, the employment agency decided to pay its staff lower salaries which were 'topped up' by expenses in a salary sacrifice arrangement.
The First Tier Tax Tribunal, in its judgement, agreed that not only were the workers ineligible to claim for travel to a temporary workplace, but that the expenses that had been paid should have been in the form of salary, and subject to standard PAYE and National Insurance deductions.
Although Reed claimed that a salary sacrifice scheme was in place, the tribunal found that no salary had, in fact, been sacrificed - payslips had just been manipulated after the event.
"...no figure for the amount of the sacrifice is ever given to the employee; we do not consider that the remote possibility of his being able to deduce it from the other figures in the payslip is sufficient. In other words, the salary was paid in full, even if there was a later manipulation. Accordingly, in our judgment, no part of the salary itself could be said to have been sacrificed."
Another key point in the decision relates to how Reed's temps were employed. They were not employed under 'overarching' employment contracts, and as such the temps were travelling to 'permanent' workplaces, rather than 'temporary' ones, so could not claim tax relief on ordinary commuting expenses.
Reed likely to appeal massive tax claim
Unfortunately for Reed, HMRC is claiming for £158m in back taxes on half a million temps employed between 2001 and 2006. Between 1998 and 2006, its temps were paid daily amounts of up to £11.45 in travel expenses (for London) and £6 for subsistence. In a further blow, Reed will not be allowed to claim back the tax from its temps.
The outcome is very likely to be challenged, as Reed claim that HMRC had given the 'all clear' to the arrangement, even though the tribunal found that the taxman did not have the authority to do so - "it was beyond the powers of HMRC to have granted it."
You can read the judgement in full here.
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