Mainpay V HMRC has only minor Travel & Subsistence implications - but still, contractors must beware

Mainpay, an umbrella company, has been having a rough time of it lately.

First of all, the Yorkshire-based brolly lost a VAT case in the Court of Appeal in December 2022.

Then, and what I’ll dissect more here for contractors, Mainpay lost to HMRC in the First-Tier Tribunal in the same month, on the staple umbrella company issue of Travel and Subsistence (T&S), writes Rebecca Seeley Harris, founder of ReLegal Consulting.

Points, and pointing out

The main point in the VAT case was whether Mainpay were providing medical care which is exempted under the VAT Act 1994, or whether it was making a standard rated supply of staff. The Court of Appeal held that Mainpay were supplying staff which was, therefore, a taxable supply.

I should point out that both the VAT case and the T&S case which was before FTT judge Robin Vos date back to 2010 and 2011. So, one would assume, that in the last decade, Mainpay (and other umbrella companies by extension) have changed their practices. 

With regards to the T&S rules specifically, these changed in 2016, as did Mainpay’s structure at that time.

What was HMRC V Mainpay about in relation to Travel & Subsistence?

The Mainpay case in the FTT was brought by HMRC to decide whether Mainpay’s workers were temporary workers, and whether they were working under a contract of employment or an agency contract. 

If it was an agency contract, were all the engagements part of a single deemed employment or an overarching contract? And even if there was no overarching contract, did all assignments form part of a single (discontinuous) employment?

Another main point, which many ContractorUK readers will be familiar with, is whether the workplace was attended regularly and was not, therefore, a “permanent workplace.” The relevance being that if the workplace is “temporary,” certain expenses are allowable deductions. Mainpay, however, were using round sum or benchmark scale rates rather than insisting that each worker provides evidence of precise amounts of expenditure. This was even though Mainpay, much like Exchequer Solutions Ltd, had not applied for or obtained a dispensation confirming that no tax liability would arise as a result of such payments.

Misleading; more HMRC-reach than meets the eye, and minor relevance

The liability under this case was not huge; the total involved amounted to just under £150,000, and this was subsequently reduced to £135,000. Looking at these numbers alone is slightly misleading, however, because it is a mere sample of the population. So, in the event HMRC won, the tax authority would issue further decisions in relation to the other workers and the subsequent three tax years. In addition, if Mainpay was found to have been careless in relation to the tax liability, the period could be extended from four to six years.

Cutting a long story short (as this case is a decade-old and so the relevance to the current day is minor if not restricted), HMRC won. The FTT found that there was no overarching contract of employment and that the workplaces were permanent, with the effect that any T&S expenses relating to individual contractors’ attendance at such a workplace were not deductible.

Worse still for the umbrella, the tax loss was found by the tribunal to have been brought about by carelessness on Mainpay’s part. Despite having various different advisers, Mainpay did not take advice specifically on this point. 

Mainpay means due diligence still mustn't be overlooked

So how is this case relevant to the current position of contractor expenses and umbrella companies? Well, in most cases, the judgment against Mainpay (fortunately) shouldn’t be, or at least it’s minor. That’s because it is now well-established that the travel and subsistence rules were changed in 2016, and it is no longer really possible to argue that there is a temporary workplace but please note, round sum expenses with no receipts were never really an argument. This is therefore one point to look out for if you’re a contractor. So, umbrella company workers need to do their ‘due diligence’ when picking an umbrella.

That seems worthy of emphasis given umbrella companies are still unregulated and likely to remain unregulated, as the government has quietly announced that they are no longer going to create a Single Enforcement Body. Where T&S was concerned, HMRC pursued the umbrella company for the tax loss but, if the worker joined a bad umbrella with a tax avoidance scheme, it would be their liability and worryingly, these companies still exist today. HMRC may well take to its website to ‘name and shame’ those umbrella companies but, in my view, it should not be up to the umbrella worker to have to police this situation.

If it's too good to be true...

That said, I do agree with the taxman’s age-old advice in this area – ‘if it looks too good to be true, then it probably is.’ Or perhaps, that should really be ‘if it looks too good to be true, then it invariably is.’ After all, in 2023, there are very few deductions that can be legitimately made by umbrella companies so, those offering exceptionally good rates should be viewed with extreme caution.

There are various self-regulating organisations such as the FCSA and Professional Passport which provide audited membership and various individual umbrella companies that are promoting good practice but, the law still needs clarification. Let’s hope that the director of Labour Market Enforcement Margaret Beels can provide some guidance in her Strategic Report on the Labour Market which -- given that so many of us have baited breathe in anticipation of -- should be a publication that knocks even Prince Harry off the best-sellers list!