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Time to check travel expenses and update umbrella arrangements? Asks Osborne Clarke.

Time to check travel expenses and update umbrella arrangements? Asks Osborne Clarke. Reed face &pound158m tax liability

The major staffing company Reed has lost its appeal against a tax assessment for &pound158M in respect of its expenses scheme for "employed temps". This is despite the fact that the expenses were paid under a series of HMRC dispensations and despite Reed being represented in the appeal by two leading QCs and one of the most expensive law firms in the country.

The decision is likely to be appealed on a number of grounds by Reed.

In the meantime it highlights the need for all umbrella companies, staffing companies and hirers who use umbrella arrangements, to immediately review the terms of their contracts with umbrella companies and/or umbrella workers.

HMRC has increasingly questioned the treatment of temporary worker travel expense as tax deductible. This Reed decision may lead to HMRC raising more unprovided-for tax assessments against organisations paying umbrella workers their travel, subsistence and accommodation expenses tax free.

Even if staffing companies using such umbrellas are not directly liable for these assessments, they may well face duty of care based claims from disgruntled workers if the umbrella they rely on to pay the workers (and in some cases have encouraged the workers to work through in return for referral fees or other incentives) becomes insolvent.

Please note however that:

  the decision was only by a first tier tax tribunal and is likely to be appealed on a number of grounds (not least Reed's claim that it had a legitimate expectation that a dispensation would not cease to apply with retrospective effect) and

  many umbrella arrangements we have seen in recent years do not have the features which seem to have caused problems for Reed in this case, and some have gone to some lengths to make sure that there is a true ongoing relationship between them and the workers between assignments. Many of these arrangements may not be at risk, although all need to be checked.

This decision confirms some of the concerns we raised in our briefing in April 2011 about some risk issues relating to umbrellas [link] - this area of HMRC attack has been on the cards for some time.

What were the key issues the Tribunal had to decide?

Although there was a lot of discussion in the judgment about the workings of salary sacrifice schemes, dispensations and Reed's legitimate expectations, the key issue for umbrella companies and users of umbrellas is the existence (or in this case the deemed lack of existence) of an "overarching contract of employment" between Reed and the workers.

The overarching nature of the contract of employment is important because:

  Travel expenses etc. can only be paid tax free where the expense is incurred in connection with travel by an umbrella worker to a temporary work place and

  a work place will only be temporary where there is an overarching contract of employment which survives the termination of each assignment (and continues in effect between assignments and into the next assignment).

HMRC argued that, for an overarching contract to exist, there needed to be an "irreducible minimum of obligation" between the parties during the period between assignments. These essential requirements were succinctly put by Stephenson LJ in Nethermere (St Neots) Ltd v Gardiner [1984] ICR 612, at 623F-G:

"A contract of service exists if these three conditions are fulfilled. (i) The servant agrees that, in consideration of a wage or other remuneration, he will provide his own work and skill in the performance of some service for his master. (ii) He agrees, expressly or impliedly, that in the performance of that service he will be subject to the other's control in a sufficient degree to make that other master. (iii) The other provisions of the contract are consistent with its being a contract of service."

What terms in the Reed contract were considered relevant?

Duration – The original contract was expressed to last so long as Reed offered the employed temp work, which was anticipated to be until the end of the assignment (which could be brought to an end at any time). The post-October 2004 contracts did not contain this provision, but were silent on the point.

Pay - Payment was for hours worked only. Nothing seems to have been paid in respect of the period between assignments.

Obligation on Reed between assignment - Reed "will endeavour to find the Temporary Employee the opportunity to work in the capacity [agreed at registration and] specified on the Temporary Employee's copy of the time sheet where there is a suitable assignment with a client for the supply of such work." (The words in square brackets were added to the October 2004 version.) If several persons were suitable Reed could select which one was offered the assignment.

Obligation on worker between assignments - The employed temp was not under an obligation to accept any assignment Reed offered. There was an (unenforceable) expectation the worker would “keep in touch”.

Annual leave - "The Temporary Employee is entitled to paid annual leave in accordance with the Regulations." Various conditions applied and the employed temp was obliged to give two weeks' notice of the intention to take paid leave. The Staff Handbook, 2001 version, stated that if the person did not work for Reed for two weeks or more this would count as a break in the determination of the 13 week qualifying period.

Notice - Both parties had to give notice of termination "in accordance with the statutory requirements."

Accordingly, when there was no current assignment, there were various contractual terms that still applied. These included the (weak and in practical terms unenforceable) obligation on Reed to endeavour to find the opportunity to work, without any corresponding obligation on the employed temp to accept any work.

The employed temp had to give notice to Reed to take paid holiday (which could in practice apply only if the person was on an assignment at the time), and Reed had to meet the statutory requirements about holiday pay. Both parties had to give notice of termination in accordance with the statutory requirements. Reed's obligations under these last two were deemed not to add anything to the statutory requirements. The notice requirement seems to have been largely ignored there was no standard form for giving notice and a witness said that giving notice was rare. The right to be given notice was deemed to be of no benefit to the employed temp since Reed was expressly "under no greater obligation than at any other time to provide work during a period of statutory notice" and so the employed temp would suffer no loss if notice were not given.

The Tribunal considered, however, that these terms are just enough to mean that there was a contract of some sort in existence when the employed temp was not on an assignment.

The key question: was there was an employment contract between assignments?

The key question is whether the contract was a contract of employment satisfying the "irreducible minimum of obligation."

Condition (i), as identified by Stephenson LJ in Nethermere (St Neots) Ltd v Gardiner, is that "The servant agrees that, in consideration of a wage or other remuneration, he will provide his own work and skill in the performance of some service for his master." Here, neither party's obligation was deemed to have satisfied that requirement: Reed's obligation was deemed (at most) to be merely to endeavour to find the opportunity to work, and the employed temp obligation was to accept any offer of work.

Nor were conditions (ii) and (iii) of St Neots satisfied: Reed was deemed to have exercised no control over the employed temp when he was not on an assignment (indeed the Tribunal observed that the employed temp might well be working for someone else who was exercising control over him), and there were no provisions of the contract that were consistent with its being a contract of service.

Accordingly, whilst the Tribunal accepted that there was a contract of some sort when the employed temp was not on an assignment, it was not a contract of employment.


The Tribunal decided that each assignment represented a separate contract of employment, and hence a separate employment under a contract of service for tax purposes. As such all travel was to the permanent workplace and the expenses were therefore ordinary commuting expenses and non-deductible (i.e. could not be paid tax free).

Note that Reed seem likely to appeal not least on the basis that the granting to them of dispensations led them to have a legitimate expectation that they would not subsequently become liable for PAYE and NICs in respect of the expenses which had been paid tax free. The Tribunal pointed out that the person applying for a dispensation bears the burden of determining the relevant facts and conveying them to HMRC and that he bears the consequences of any error he makes. The issue for Reed was that HMRC (and the Tribunal) did not feel that Reed had explained sufficiently fully the basis of its relationship with workers between assignments and as such any "approval" of the travel scheme was invalid and capable of (hugely costly) retrospective withdrawal.

Actions for organisations involved in supplying or using umbrella workers

Make sure umbrella arrangements are reviewed in light of this case checking in particular, between assignment contractual obligations and practical arrangements relating to the periods between assignments. Guaranteed minimum hours are unlikely to be enough to create an overarching contract of employment. (Of course many umbrella arrangements will not have the features which seem to have caused Reed problems, but they need to be checked).

Don't think that just because your umbrella has a dispensation they (or you) are home and dry.

Don't assume that just because your umbrella is large and well established that it is without risk – some big umbrellas have questionable models whilst some smaller ones are impeccable.

Staffing companies, managed service providers and hirers should carefully review exclusive and/or generous referral arrangements with umbrella companies whose arrangements may have features in common with the Reed arrangements. Users of umbrellas may never be able to tell for sure which umbrella arrangements are completely secure and, pending clearer case law, might be wise to hedge their bets, allowing workers to select umbrellas which have satisfied certain basic due diligence tests using a checklist approach.

Do not necessarily shovel all umbrella workers into personal service companies instead to avoid "umbrella" worries – that may cause tax debt transfer liability for the "shoveller" under the MSC tax legislation.

If you are setting up a travel and subsistence scheme or similar ensure that the employment contracts, practices and promotional materials are drafted and/or checked by employment lawyers who understand umbrella arrangements.

Consider a strategic review of the contractual models under which workers are supplied to or by you taking into account: this decision, the requirements of AWR (including Swedish derogation models), the compulsory pension contributions for employees, umbrella workers and PAYE workers from 2013, the proposed introduction of a General Anti (tax) Avoidance Rule, and the possible replacement of IR35. We consider that recent and imminent legal and tax changes mean that umbrella and related arrangements will have to continue to evolve if they are to be safe. Ironically, whilst Swedish derogation models may provide questionable protection against AWR comparable pay liability a pay between assignments contract should go a long way to addressing most of the concerns raised by HMRC in this case.

Please let us know if you have any concerns about this case or your supply arrangements.


Kevin Barrow


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