Employers should learn from Reed salary sacrifice tax case

A RECENT tribunal ruling against recruitment firm Reed in a £158m tax case over a salary-sacrifice scheme has highlighted the need for employers to explain tax-relief arrangements clearly to employees and the taxman, experts say.

Reed provided daily travel and subsidence for its temps – effectively deducted from their salaries and free of income tax and national insurance.

The scheme was applied to 500,000 temporary staff between 1998 and 2006. HM Revenue and Customs (HMRC) is claiming for £158m of unpaid tax and NI between 2001 and 2006, despite having given “dispensation” for Reed’s salary sacrifice scheme five times.

Reed argued that because its employed temps sacrificed some of their salary in exchange for travel and subsidence allowances the allowances should not be taxed as earnings.

The taxman’s arguments against the scheme included that Reed’s contracts with its employed temps were not an “effective salary sacrifice”; the allowances did not represent the reimbursement of expenses, but were simply part of the employed temps’ salary; and that even if the allowances were paid in relation to expenses the expenses were not deductible.

The ruling is complex and lengthy – around 47,000 words – but hinges on a couple of key points: the employment status of the temps and their workplace; and whether the salary sacrifice scheme was explained properly to Reed’s temps.

Reed argued that employed temps were engaged by a single contract to work on several assignments. Clients’ premises should be treated as temporary workplaces for tax purposes, Reed argued, meaning that temps could be given money towards the cost of travel and subsistence without being taxed on it.

HMRC argued that each assignment undertaken by a temp should be treated as a separate engagement with a single workplace. This meant that the workers would incur “ordinary commuting” expenses that cannot be claimed as tax-deductible expenses.

The tribunal noted that most Reed temps would probably struggle to understand the company’s description of the salary sacrifice scheme in staff handbooks. The scheme required to “adjustments” to pay and the travel allowance was initially paid in £50 tranches and later on a weekly basis.

“It is, at best, doubtful whether any employed temp reading that passage would understand it to mean that he or she was giving up any salary; moreover, the numerous enquiries by concerned employed temps,” the tribunal noted in its judgement earlier in January.

The tribunal accepted that although there was a contract of “some sort” when the employed temp was not on an assignment, it was not a contract of employment.

Each assignment the temps undertook represented a separate contract of employment – “employment under a contract of service” for tax purposes – the tribunal ruled. This meant that the temps were travelling to a “permanent” workplace and incurred “ordinary commuting expenses” that were not tax deductible.

Mark Groom, partner at Big Four firm Deloitte, who specialises in employment taxes, says the ruling, although not legally binding, was important because it would guide the taxman’s thinking on the tax status of salary sacrifice schemes.

The ruling highlighted the need for employer’s salary sacrifice schemes to be easy to understand, he says.

Stephen Herring, partner at BDO, says the ruling shows how important it is for employers to let HMRC know if their salary-sacrifice scheme changes and for HMRC to “probe more deeply” before giving dispensations to salary sacrifice schemes.

Reed says in a statement that it was “disappointed” by the tribunal’s decision and that it will seek a judicial review over “unfair treatment” by HMRC.

It adds that the tax dispute does not have an impact on temporary workers past or present. “There has also been no decision taken on the size of the claim and Reed disputes the figure proposed by HMRC.”