The First Tier Tax Tribunal has given its decision in the case of Reed Employment Plc & Ors v HM Revenue & Customs [2012] UKFTT 28. This is a complex case, and the judgement given on 6 January runs to over 300 paragraphs.

Simply put, Reed thought they could pay a travelling allowance to its employed temps, by way of a salary sacrifice, without the payment being treated as employment income or earnings for PAYE income tax and Class 1 NICs. The allowances had been paid through two different schemes over a number of years. Reed thought they were safe as they had obtained official dispensation agreements from HMRC that the allowances paid were not taxable. 

In 2004, HMRC started to have misgivings that the dispensations they'd granted were actually against non-allowable travelling expenses. HMRC's argument was that the travelling allowances were the payment of disallowable home to work travel for employees with a permanent workplace (i.e. the client's premises for the duration of their engagement), and not allowable travel for employees working at a succession of temporary workplaces. HMRC were also of the opinion that Reed had not been operating a tax/NICs efficient salary sacrifice in relation to the travelling allowances. Therefore, the payment of the allowances were just the payment of taxable wages.

In 2006, after the revocation of the latest dispensation, Reed started a new scheme which tried to establish that employed temps were employed on an "over-arching" contract. In other words, they had a contract that subsisted after a particular placement had ended and continued until the start of the next placement, rather than a number of single contracts covering each placement. Thus they hoped to prove that when employees were travelling to and from placements they were travelling on the job to a succession of temporary workplaces rather than just to one permanent workplace.

In 2007, HMRC made a number of determinations of the amount of tax/NICs underpaid due to the payment of the disallowable travelling allowances. The total amount due, including interest, over the period 6 January 2001 to 5 April 2006, was £158 million. It was estimated that during this time period about 500,000 workers had been paid travelling allowances. Legally and practically, Reed stood no chance of recovering any underpayments of tax/NICs from these workers.

The Tax Tribunal had to decide: (1) Was the payment of the travelling allowances part of a tax/NICs efficient salary sacrifice? (2) Were the travelling allowances allowable for tax/NICs relief? (3) Could it be said that Reed's employed temps really had "over-arching" contracts of employment?

If a salary sacrifice is to be tax/NICs efficient, it must be clear from the employee's terms and conditions of employment that they have given up all rights to an amount of wages/salary to be given a benefit in kind instead. In the absence of any clear and unambiguous statement in terms and conditions, the employee's pay slip will be taken into consideration when deciding whether a salary sacrifice has actually taken place. In HMRC's view, Reed's contracts with its employed temps did not provide for an effective salary sacrifice, and there was no such sacrifice as a matter of fact. The employee's pay slips were also found to be no use in deciding whether a genuine salary sacrifice had taken place. At best they were misleading and had given rise to may questions from workers who could not understand what they were being paid. Also, the travelling allowance did not represent the actual payment of expenses, but were simply part of the employed temps' wages. Even if the payment had genuinely been paid in respect of actual expenses, those expenses were not tax relivable. Further, HMRC were not prepared to accept that Reed could use any dispensation as a means of avoiding its liability.

The Tribunal judge made the following interesting observation: "In our view a salary sacrifice implies reciprocity: the employee gives up a portion of his or her earnings, even if the portion is variable, in exchange for an identified benefit provided by the employer. Reed, however, did not provide any benefit at all; it merely applied the dispensation in order to enable it to attribute part of the pay, entirely notionally, to the reimbursement of expenses, so that the tax and NICs burden could be reduced. Far from providing a benefit to the employed temp, it appropriated a significant part of the savings to itself; and the supposed sacrifice, however it was presented, was no more than an arithmetical adjustment whose purpose was to ensure that Reed secured the intended share of the benefit. It was not, in our view, a sacrifice in the true sense of the word."

As to whether the employed temps', when travelling to client's premises, were peripatetic workers being sent to work for many different clients, as Reed maintained, or as workers working at a series of permanent workplaces, as HMRC maintained, the Tax Tribunal agreed with HMRC. Each of the client's premises counted as a permanent workplace for the duration of the assignment and the travel expenses were accordingly disallowable ordinary commuting expenses.

But what about Reed's claim that its employed temps did not have a series of (mostly short-term) contracts, but rather an "over-arching" one that lasted during the periods the worker was not being sent to work at a client's premises?

Despite what Reed maintained, the Tax Tribunal accepted HMRC's view that the contracts Reed had with its employed temps were always intended to be contracts subsisting only for the duration of each assignment. Therefore, although the Tribunal accepted that "there was a contract of some sort when the employed temp was not on assignment, it was not a contract of employment."

Therefore, the only logical conclusion of refusing to recognise that Reed's employed temps had an "over-arching" contract was that "each of their assignments represented a separate contract of employment for tax purposes." This meant that their travel to each assignment was "travel to a permanent workplace and the expenses were ordinary commuting expenses and non-deductible." 

In conclusion, the Tribunal "was satisfied that the allowances, although purportedly covered by a dispensation, were [taxable] earnings which did not attract tax relief because they were paid to reimburse ordinary commuting expenses (because the employed temps had a series of job-by-job contracts, and not continuing contracts of employment)." Therefore, "Reed should have accounted for tax and NICs on the allowances throughout the relevant period and that the assessments and determinations were, in principle, correctly made."

Due to the sums involved, I cannot see that Reed will not appeal if it can find errors of law in the Tribunal's judgement. Even if there is an appeal, the Tribunal's judgement is an excellent introduction to three important principles: (1) the nature of a true tax/NICs efficient salary sacrifice; (2) that an employer cannot rely on a dispensation when the circumstances under which it was granted are patently incorrect; and (3) that employment contracts are what they in truth, not what an employer may like to call them.