Salary sacrifice fails for defective implementation; dispensation no protection against past tax and NIC

Thu 17 Apr 2014

The very lengthy (100+ pages) decision of the Upper Tribunal in Reed Employment v HMRC is a salutary reminder that for a successful salary sacrifice it is vital to establish the facts and pay attention to detail in implementation, and that a dispensation or clearance obtained with anything short of full disclosure of all relevant information is worthless.

Payments borne or reimbursed by an employer for the cost of an employee’s travel between home and a temporary place of work were removed from employment tax by FA 1998.  The exclusion now appears as ITEPA s338.  An employment agency, Reed, also operated an employment business which provided workers to its clients.  With assistance from their advisors, Reed changed the terms under which they employed the individuals so that rather than the employees paying their travel expenses, the headline pay was reduced and separately Reed reimbursed the employees’ travel, asserting that this was reimbursement of travel to a temporary place of work. Reed had applied to HMRC for a PAYE dispensation in respect of travel costs. The dispensation was granted.

The UT confirmed the decision of the FTT holding that the purported reimbursed travel was not within the exclusion from tax leaving Reed having to pay £158m of income tax and NIC.

Reed failed for many reasons.

• Although some of the paperwork stated that the employees agreed to accept a lower gross wage and the employer reimbursing travel costs, the actual documentation showed that the employees continued to be entitled to the pre-existing hourly rate.  Reed did not communicate the reduction of gross pay to their temps.  The “manipulation” on payslips of deducting an amount for travel expenses and then adding it back on again made no change to the temp’s contracted pay.
• Even if Reed had properly implemented the contractual changes, they would then have failed on the fundamental issue that contractually each place the individual worked at was a separate place of employment; there was a separate contract of employment for each assignment.  Each of the locations at which the individuals employed by Reed worked at was thus a permanent workplace.
• Reed’s next attempt was to invoke employment law to link the various separate assignments and then assert that each assignment was a temporary one within a longer employment. This failed. Concepts such as continuity of employment cannot be read into tax law.
• Had Reed implemented the salary sacrifice correctly, the dispensation would have applied. However as the travel allowance was not for travel to a temporary workplace it was taxable on basic principles and thus the dispensation was of no relevance.
• The final attempt by Reed was to invoke judicial review that what they did was what was put to HMRC and thus they had a legitimate expectation from the dispensation that they should not be taxed.  The dispensation was based on what Reed told HMRC.  The UT agreed with the FTT that “Reed did not volunteer to HMRC all the details of the scheme” and “Reed was less than forthcoming with HMRC.”  Thus Reed could not escape from assessment of the earlier years based on a reliance on the dispensation as they had not given HMRC the full picture.

It is apparent from the case that HMRC did not handle the request for views on the salary sacrifice or the dispensation well. And an HMRC official admitted in an internal email that “Reed may well have a strong case.” (para 84)  However Reed’s lack of candour and failed implementation denied them the possibility of benefitting from HMRC’s errors.

What should they have done?

Reed themselves had correctly identified the requirements for an effective salary sacrifice scheme with respect to reimbursed travel to a temporary place of work (para 48 of decision):

1. the employed temps agree to work for a lower wage or salary in order to benefit from the scheme;
2. the expenses Reed was to reimburse were deductible expenses [i.e. in this case for travel to a temporary place of employment]; and
3. the amounts paid taken overall (since round sum payments were to be made) did not carry with them an element of profit in the employed temp’s hands.

Reed failed both 1 and 2.

In seeking a dispensation all relevant facts should be put to HMRC.  Had Reed “put all their cards face up on the table” to HMRC (per MFK Underwriting) the dispensation may well have protected them from tax and NIC on historic liabilities.