Exchequer Solutions Ltd just lost its expenses appeal. Here’s what the binding ruling backing HMRC really means...

With potential implications for other brollies more so than brolly contractors, umbrella company Exchequer Solutions Ltd has lost its appeal against HMRC at the Upper Tribunal for expenses payments under travel and subsistence, writes Rebecca Seeley Harris of ReLegal Consulting.

What the ESL case is all about

For the uninitiated, this case was an appeal to the Upper Tax Tribunal by Exchequer Solutions Limited (ESL), and it was heard over three days in November 2023 with the UT’s judgment released on Jan 24th 2024.

The case concerned whether ESL could deduct reimbursement of travel expense payments to its employees for the purposes of income tax and National Insurance Contributions. At the First-Tier Tribunal (FTT) in May 2022, the FTT had found against ESL and held that it was not allowable.

Both parties, being HMRC and ESL, had at least agreed that ESL was the employer of the relevant individual during the assignment. What was at issue was whether ESL was also the employer during the gaps between assignments in what is called an ‘overarching’ contract of employment.

Overarching contract of employment

Whether it was an overarching contract or not directly affected whether ESL could deduct travel reimbursement expense payments. If there was an overarching contract in place, the different assignment locations would be temporary work locations. The result being that ESL would not be liable for PAYE and NICs on its reimbursement of travel from the individual employee’s home to their place of work.

If ESL is only the employer during each assignment -- and not also the employer for gaps between assignments, however, each place of work would be permanent in respect of each separate assignment. The reimbursement of travel expenses would then be disallowed on the basis that the expenses were ordinary home-to-work commuting expenses.

To establish whether there was an overarching contract of employment in place, the UT needed to look at our old friend ‘mutuality of obligations’. In the FTT, the tribunal had agreed with HMRC that the required mutuality of obligations was missing.

Travel expenses legislation

It is useful to look at the travel expenses legislation to understand what is and isn’t allowable.

So, s.338 Income Tax (Earnings and Pensions Act) 2003 (“ITEPA”) allows travel expense deduction, but not for the ordinary expenses of commuting. This means travelling between home and a permanent workplace or, in the terms of the legislation, a workplace which is not a temporary workplace.

Contract of employment, it's a three-stage test

The conventional starting point for establishing a contract of employment is the three-stage test in the Ready Mixed Concrete case of 1968.

The three conditions are, very basically, that a contract of service exists if:

a) there is sufficient mutuality of obligations and personal service,

b) control; and

c) that the remaining provisions of the contract are consistent with it being a contract of service.

The focus of attention in Exchequer Solutions’ appeal is on the first stage -- mutuality of obligations. The discussion in this case is useful for employment status principles anyway, regarding what is the current thinking on mutuality of obligations.

Mutuality of obligations

There was no dispute between HMRC and ESL that there was a need to show that mutuality of obligations existed.

It was noted in Atholl House Productions (the ‘Kaye Adams case’) in the Court of Appeal that: “While a single engagement can give rise to a contract of employment if work which has in fact been offered is in fact done for payment, an overarching or umbrella contract lacks the mutuality of obligation required to be a contract of employment if the putative employer is under no obligation to offer work.”

MOO principles

The following principles of mutuality of obligations, were discussed by the FTT and were not under dispute by the parties or the UT:

(1) There must be ongoing obligations on the part of both the employer and the employee throughout the whole of the duration of the contract, including any period when the employee is not working.

(2) There must be an obligation on the employer to provide some work or to pay a retainer or to provide some other meaningful benefit [the FTT later referred to a need to provide a “valuable benefit”] whilst the employee is not working. There is however no requirement for the employer to guarantee a minimum level of work.

(3) The employee must be under an obligation to accept at least some of the work offered even though they may be free to turn down work for any reason.

The UT decision against Exchequer Solutions Ltd

The UT found that the challenge by ESL was unsuccessful and agreed with the FTT that: “There was no work obligation, not even a contingent obligation, and no obligation to accept (not even a contingent obligation).” There was, therefore, no overarching contract of employment.

Lastly, the real-world...

What Exchequer Solutions’ defeat means -- in the real-world -- is that umbrella company workers cannot recover the expense of travelling to their place of work during the assignment where that place of work is considered to be a permanent workplace. This case sets a binding precedent because it is in the Upper Tribunal.