HMRC v Reed

One of the UK’s largest employment agencies has been found liable for up to £158m of unpaid tax due on the salaries of thousands of temporary workers. The Upper Tribunal has backed an earlier judgment which found that PAYE and NICs should have been paid on the entirety of Reed’s employed temps’ salaries between 1998 and 2006. The potential total includes interest on the tax and NICs due.

Over the eight year period, Reed described part of the salary earned by its employed temps as expenses for travel to work that were paid without making deductions for PAYE and NICs.
Reed had argued that, because HMRC originally allowed these arrangements, the employer could not now be expected to pay any PAYE and NICs due on the expense reimbursements.

However, the Upper Tribunal has now endorsed an earlier First-tier Tribunal judgment which found that the expense payments were part of the employed temps’ ordinary salary payments and, as such, PAYE and NICs were due on them. It also found that, when HMRC originally considered Reed’s arrangements, it had not been given a full picture by the company of how they worked.

This case has generated much publicity and employment agencies are rightly asking themselves what measures they should be taking, if any, to minimise the risk of similar liabilities arising from their own Travel & Subsistence schemes or Umbrella company arrangements.

It is important to note that this week’s judgment has not brought any new considerations to the fore, it has simply confirmed the principles applied in the original ruling of January 2012; in effect there is no “new” news. Reed still has an opportunity to appeal the decision, but irrespective of the final outcome, the case emphasises the need for specialist compliance support in this area.
Overarching contract

Fundamentally, and despite taking advice, Reed failed to properly address the concept of an overarching contract which plays a major part in determining the worker’s temporary employment status.

The nature of an overarching contract of employment is that it links together a series of assignments with the expectation that the worker will move from one assignment to the next whilst contracted with the one employer. In doing so, the terms of the contract are binding throughout the period of employment, whether or not the worker is actually on an assignment. An overarching contract of employment must provide for mutuality of obligation between the two parties during periods between assignments.
The dispensation

Reed also argued that the expenses paid without the application of PAYE and NIC were made under a dispensation awarded to Reed by HMRC and that because HMRC originally allowed the arrangements, the employer could not now be expected to pay any PAYE and NIC due on the expense reimbursements. However, despite HMRC confirming it did not properly review the application for the dispensation in the first place, HMRC successfully argued that it had not been given the full picture by Reed of how the arrangements worked and therefore the dispensation should be revoked and employment taxes charged retrospectively.


Risk-averse compliant employment agencies and umbrella companies should bear in mind the facts of the Reed case, but still review their own contracts of employment and dispensation or those of its umbrella company provider. Very simply, a compliant business should not see anything new emerging from the latest judgment, but a reminder of basic considerations.

A genuinely compliant employer will issue its employees only a permanent, overarching contract of employment.  In April 2013 HMRC issued guidance in its Employment Status Manual to clarify what it expects to see in an overarching contract of employment; confirmation of Mutuality of Obligations is a must.  Similarly, a compliant business should have a dispensation from HMRC that has been awarded on the basis of full disclosure to HMRC.

JSA offers you peace of mind

A compliant umbrella company, such as JSA, is an expert in this area. At JSA, compliance is at the heart of everything we do, and every year we invest considerably in advice on employment law and tax legislation. In the past year alone Saffrey Champness, BDO and Acumen have audited our contracts and working practices. This is something we do voluntarily as our clients need to know we have done the utmost to mitigate risk.

Furthermore, as a member of the FCSA, JSA has signed up to most compliant code of conduct. In March EY conducted its annual review of JSA on behalf of the FCSA, the results of which are shared with HMRC. EY has confirmed that JSA’s contract of employment is overarching and our dispensation properly applied.

We should like reassure our clients that we believe they need take no action in light of the Reed case. Obviously we cannot comment on the compliance of an agency’s own T&S scheme, but we can assure you that the JSA umbrella solution minimises the risks highlighted by Reed. And as the legislative landscape evolves, JSA will always endeavour to address these risks on your behalf – your peace of mind is the key to a long, successful partnership.

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