What Reed's expenses defeat means for temps

It is agencies and clients who are taking steps in light of Reed losing its expenses claim, but checking that a contract is truly overarching and has mutual obligations in gaps between assignments is a job contractors can do too, writes Lucy Smith of Contractor Umbrella.

Unfortunately for all parties, it is not clear at this time what would suffice in relation to mutual obligations in the gaps between assignments, although there are a few clues.

Overarching contract: the four ‘must- haves’

In particular, HM Revenue & Customs said late last year that there must be a sufficient degree of control exercised over the worker -- the contractor -- by the employer.

The Revenue’s ESM2045 update also highlighted that a contract will not be an overarching employment contract purely as a result of the inclusion of a clause providing for a guaranteed minimum number of hours in any 12-month period.

So to reiterate, for a contract to be overarching -- and therefore allowing of tax relief on travel and subsistence expenses -- there must be:

  1. Mutual obligations during the gaps between assignments; and
  2. More than just a clause guaranteeing a minimum number of hours, and
  3. A significant degree of control exercised over the worker.

We can add a fourth criterion. So in addition to the above, for a contract to be truly overarching, other terms and conditions the umbrella company worker signs up to must be consistent with the contract being an employment contract. In other words, both the overarching contract of employment and the realities of its implementation in every day working practice must perfectly reflect each other.

HMRC V Reed Employment

In the Reed case, the taxman was vindicated as the Upper Tier Tribunal agreed with his assertion (backed by the First Tier Tribunal) that each assignment was a separate employment, meaning there was not enough mutuality of obligation (MOO) between assignments to make the contract overarching, under which each assignment would be a temporary workplace and would therefore be eligible for tax-free expenses.

We often say that where a truly overarching contract exists, the worker is agreeing to provide their skill and the employer in agreeing to pay for that skill, thus providing MOO throughout what should be a series of temporary assignments. This criterion (listed as number one, above) is essential in establishing an overarching contract as, without it, one cannot exist. It seems that this key area is a one which Reed was challenged and, for now, has lost.

Temps can’t do it by themselves

Crucially for contractors, however, it is not sufficient for there to be mutual obligations in the gaps between assignments either only on the part of the worker or only on the part of the employer. Put another way, there must be subsisting mutual obligations present in the gaps between assignments on both parties.

What tax inspectors look for

Interestingly, HMRC guidance on the subject of what actually constitutes an overarching contract has, until now, been perceived as debatable. But in light of Reed’s defeat, it can now be safely assumed that MOO must be shown to be in place further than just the time spent under assignment --- indeed, MOO must be prevalent for time spent out of assignment too.

Combined with HMRC’s update last year on the issue, we would go so far as to say that the tax authority currently believes that in order for a company to legitimately operate an overarching contract of employment, and therefore for travel and subsistence expenses to be allowable, the company must make some provision in the contract for pay between assignments and the control during such periods.

This means that such companies -- those providing travel and subsistence schemes for their workers – must have a truly over-arching contract in place that contains provisions relating to mutual obligations in the gaps between assignments.

The bigger picture doesn’t bode well for tax avoiders

It’s not just Reed’s defeat (which means the recruitment group faces a liability of up to £158m) that suggests complacency, or doing nothing, is unwise, In fact, the subject of tax avoidance is still a hot one as far as the government is concerned, evidenced by its ‘pay-up first’ avoidance rule and its crackdown on ‘false self-employment’ in the shape of the onshore intermediaries legislation. Bear in mind, HMRC thinks that what Reed did amounts to tax avoidance and now similar schemes could be pursued. This clearly is the time to ensure that your overarching contract is watertight and that what is written on it does actually get put into practice, professionally, daily and without exception by all parties concerned.

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