The First Tier Tax Tribunal (FTT) has found a major employment agency's salary sacrifice-travel scheme ineffective for tax.
In Reed Employment Plc (and other Reed companies) v HMRC, Reed, an employment agency, made use of the employee travel rules to reduce the taxable pay of some 5,000 workers.
Workers entered into a salary sacrifice agreement under which they gave up pay and were paid travel and subsistence allowances instead, their net pay was unchanged.
Travel allowances were paid on the basis that travel was being made to temporary workplaces attended under an overarching employment contract.
Many workers did not understand the deductions made on their payslips which is why it came to HMRC’s attention.
The First Tier Tax Tribunal (FTT) found that the salary sacrifice was not effective as the workers could opt in and out of the scheme, and had not given up their pay, there was no sacrifice as such. No benefit was received by the employees, as Reed kept most of the profits under the scheme.
The FTT also ruled that the workers contracts were not really overarching contacts of employment at all. Although there was a single contract, its terms meant that workers were unpaid and no employment relationship existed between assignments. The result according to the FTT was that each assignment represented a single employment and the workplace so attended was therefore not temporary because it was the only workplace for the duration of the employment. This meant that travel to and from each assignment was ordinary commuting and disallowable for tax.
Although this case affects agencies, it may also affect any other employer who is relying on over-arching employment contracts in order to meet the temporary workplace rules. Companies should avoid salary sacrifice schemes that their employees do not understand. An interesting point was raised over whether employees should need to receive any benefit in order to make an effective salary sacrifice. A salary sacrifice has to reflect a genuine change in the contract, so no opting in and out again. If an employment contract is intended to be an overarching contact of employment it needs to be demonstrated that it genuinely is so throughout.
Watch this space: we expect Reed to appeal as there is substantial tax at stake