A London based umbrella company has lost an appeal at the Upper Tribunal over a tax liability on subsistence payments to agency workers
The appellant is Mainpay, an umbrella company which engages temporary workers, principally in the education, health and social care sectors, and has contracts with employment agencies used by hospitals and schools.
The Upper Tribunal dismissed the case, but did not address the quantum.
The final settlement with HMRC is likely to be significantly higher than the £135,000 cited in the First Tier Tribunal (FTT) decision released in December 2021 as the quoted figure only related to a sample of the workforce for the tax year ended 5 April 2011.
The appeal at the Upper Tribunal centred around Mainpay’s rejection of the FTT decision in 2022 around whether subsistence payments for contractors were deductible and whether each workplace attended by Mainpay’s workers was a permanent workplace.
Mainpay reimbursed subsistence expenses to workers using round sum or benchmark scales, and claimed that such reimbursements were deductible from each worker’s earnings for the purposes of income tax and national insurance contributions (NICs).
The appellant argued that it engaged the workers on the terms of a single employment contract, so therefore each of the places where a worker carried out an assignment was a temporary rather than a permanent workplace. This meant the expenses were ‘not prevented from being deductible’. It also added that workers tended to spend around eight to 13 weeks at each assignment.
HMRC disagreed, stating that each workplace was a permanent workplace, and, in any event, scale rates could not be used without agreeing a dispensation in advance.
HMRC sent Mainpay determinations for PAYE and decision notices for NICs, based on a denial of a deduction for the reimbursed subsistence expenses.
The determinations were issued under Regulation 80 of the Income Tax (Pay As You Earn) Regulations 2003 for the years ending 5 April 2010 to 5 April 2014. The notices of decision related to NICs for the tax year 2010-11 under section 8 Social Security Contributions (Transfer of Functions) Act 1999.
For two of the relevant tax years, the assessments were issued four years late so they were only valid if HMRC could show that any loss of tax was brought about carelessly by Mainpay.
At the tribunal, barrister Michael Firth KC argued that ‘all of the assignments were carried out under the terms of a single employment, each workplace was a temporary workplace’. This raised the question of ‘mutuality of obligation’.
Firth argued that the First Tier Tribunal (FTT) erred in law in concluding that (1) workers had an unfettered right to refuse any assignment, and (2) there was no obligation on Mainpay to pay for a minimum number of hours of work if that work was not offered by the umbrella company.
As a result, the tribunal ‘erroneously’ concluded that ‘there was no mutuality of obligation for employment purposes during the gaps between assignments’.
However, the Upper Tribunal rejected this argument, finding that the 2013 contract was an overarching contract of employment.
It also took issue with Mainpay’s second ground for appeal that ‘successive assignments under the same overarching contract represented single employments’.
Judge Thomas Scott said that ‘Mr Firth deserves credit for his ingenuity and tenacity in devising and pursuing this argument’.
‘We do not accept that it is inherently surprising or illogical that an umbrella contract may be capable, depending on its terms, of being an overarching employment contract, or an agency contract, or neither,’ he added.
‘Nor is it surprising or illogical that the applicable categorisation could bring with it different tax and employment law consequences.
‘We consider that the FTT made no error of law in determining this issue.’
The tribunal found that the definition of ‘employment’ in section 4 Income Tax (Earnings and Pensions) Act 2003 (ITEPA), while not exclusive (‘includes in particular’) focuses on particular types of contract, in this case a “contract of service”, and we agree with the FTT (at FTT[148]) that section 4 provides no support for the suggestion that a single employment may encompass more than one contract of service.
‘A dividing line which takes into account the presence or absence of mutuality in the gaps between assignments when considering an umbrella contract is entirely logical,’ the tribunal stressed.
HMRC barrister Sadiya Choudhury KC’s skeleton argument set out that Mainpay’s alleged carelessness related to the question as to whether or not subsistence expenses were deductible at all (on the basis that the contract was not an overarching contract of employment).
Firth retorted that HMRC’s pleading was ‘so vague as to be meaningless’, and contained no explanation of how the careless behaviour brought about the loss of tax. He also stressed that Mainpay had used an accountant called Mr Hugo, who had ‘significant experience in the operation of umbrella companies…well aware of the complexities of ensuring that expenses could be reimbursed on a tax free basis’.
The Upper Tribunal was not convinced by this argument, finding that ‘the mere fact that Mr Hugo was a consultant does not, however, establish that Mainpay took reasonable care in relying on his advice’.
Judge Scott said: ‘We agree with HMRC that it is not sufficient for Mainpay simply to say that it was relying on an adviser.’
All grounds of the appeal by Mainstay were dismissed and the two parties will have to resolve the quantum as the tribunal did not consider this issue.
Story by Sara White from Accountancy Daily
