HMRC closes in on Reed's £158m temps' tax bill

Firms supplying or using umbrella company contractors should act now rather than just feel “nervous” from an expenses ruling in favour of the taxman, which may hold more significance than the onshore intermediaries rules.

Issuing this statement, a legal advisory said such firms should review their umbrella arrangements and check whether the employment contracts, notably ‘between assignments’ obligations, are truly overarching.

But the firms mustn’t view the umbrella’s dispensation as a ‘silver bullet’; cannot assume the umbrella’s large size makes it safe and, to avoid the MSC legislation and TAAR, shouldn’t “shovel” the workers into PSCs.

This guidance from the advisory, Osborne Clark, is in response to recruiter Reed losing its £158million battle with HM Revenue & Customs, relating to two travel expenses schemes that covered 500,000 temps.

In fact, the Upper Tax Tribunal (UTT) has backed an earlier judgement by the First Tier Tax Tribunal which found that PAYE and NICs should have been paid on the temps’ salaries between 1998 and 2006.

That’s because the tribunals say the temps were engaged under a series of job-by-job contracts and not, as Reed argued, under a contract that continued following the end of an assignment (known as an over-arching contract) -- which would afford tax relief on expenses.

Specifically, the UTT found insufficient mutuality of obligation over the duration of the temps’ employment, including gaps in between jobs, to qualify each assignment as a temporary workplace justifying tax-free expenses.

Put another way, Reed was unable to convince the tribunal that the umbrella contracts really continued in force between assignments, such that each place of work was temporary, in respect of which expenses were payable without tax.

The UTT finding that no significant degree of control was exercised over the temps between assignments further hindered Reed’s appeal, given that an element of ‘control’ is needed for a contract to be one of employment.

The recruiter also argued that because HMRC originally accepted the arrangements – namely that the temps got part of their salary paid as expenses for travel to work without PAYE/NIC deductions – that it was unfair of the department to change its mind.

However the Revenue successfully argued that it was not given the “whole picture” of how the recruiter would benefit when the dispensation was granted, implying that the company allegedly kept quiet about some aspects of the schemes.

Kevin Barrow, partner at Osborne Clark added: “The decision found that there were some legal deficiencies in the contract arrangements adopted by Reed.

“[And] note that Reed’s position was not helped by the fact that the communications between them and their (accountant) advisers were not legally privileged and had to be disclosed to HMRC, including damaging internal notes describing the schemes as ‘very aggressive’.”

He points out that although the case is binding, meaning any points of law decided in it will also apply to other cases, Reed has three months to seek permission to appeal to the Court of Appeal which, if it overturns the case, HMRC (and other tax tribunals in the future) would not be able to rely on it.

For now though, Barrow says some staffing companies and hirers who rely on umbrella expenses schemes may be “nervous,” partly as it remains to be seen whether HMRC will pursue similar arrangements.

But that nervousness also stems from the fact that “many” other umbrella tax schemes were set up at the same time as the Reed scheme and “we believe that some may have adopted similar approaches”.

The lawyer reflected on his assessment: “It is likely that many operators of umbrella arrangements have updated their contracts, although this will need to be checked.

“Perhaps the key question is whether operators of umbrella arrangements have potentially large historic liabilities relating to older-style schemes (even where they were under HMRC dispensations and apparently ‘approved’) and whether those potential liabilities could cause those businesses to fail.”

One consequence of an operator of an umbrella scheme failing is that the contractors – the umbrella’s employees – get left out of pocket and, following insolvency in the supply chain, often look to hirers to pay them, as users of Albany did.

To help concerned parties, Osborne Clark has produced a bullet point list of ‘Dos and Don’ts’ in light of Reed’s defeat, which the legal advisory believes has the potential to hit more than just the recruiter’s subsidiaries.

"A number of Reed group companies face a liability of up to £158m," the advisory said. "This is arguably a bigger tax development for many suppliers and hirers of contingent workers than the recent introduction of the [Onshore] Intermediaries Legislation… [so] consider a strategic review of the contractual models under which workers are supplied to or by you, taking into account this decision."

Editor's Note: Further Reading -

What Reed's expenses defeat means for temps

Profile picture for user Simon Moore

Written by Simon Moore

Simon writes impartial news and engaging features for the contractor industry, covering, IR35, the loan charge and general tax and legislation.
Printer Friendly, PDF & Email

Sign up to our Weekly Newsletter

Keep up to date with everything in the world of contracting.


Contractor's Question

If you have a question about contracting please feel free to ask us!

Ask a question