“After a brief discussion it was agreed that the following are the areas of risk: • The lack of clarity of the calculations on the payslip and whether therefore Reed was complying with its obligations to the temps in respect of the format of payslips. • Whether the deduction of the tax saving is legal • Whether the Inland Revenue requirements are being adhered to … • Whether if you take out the travel allowances [here meaning the amounts permitted by the dispensation] the National Minimum Wage requirements would be met.” 116. There were several sample payslips within the documents produced to us. One typical of the pre-April 2001 system was described in some detail by Mr Beal. It shows on the left hand side that the employed temp, who appears to have had several assignments during the week, earned total gross pay of£523.26 . From that sum was deducted an item identified as “PRP/EXP ADJ” of£50.60 . At this time (March 1999) Reed was still operating its PRP scheme. Although the PRP and RTA schemes were distinct, no attempt was made, at least on the payslip, to segregate the portions of the£50.60 which were attributable to each of them. The purpose of the deduction, as Mr Beal also explained, was to bring the net pay back to what it would have been without participation in the scheme. In this case, the gross pay after the adjustment was£472.66 . On the right hand side of the payslip appeared the income tax (£55.47 ) and employee’s NICs (£36.48 ) deductions, leaving net pay of£380.71 . In a box at the foot of the payslip appear the words “This is what your payslip would have shown if you were not included in the PRP and expenses scheme this period”, followed by other figures leading to a final net sum of£380.71 , the same as the amount actually paid. However, in another box was shown the aggregate of the travel-to-work payments accrued to date, in this case£9 . There was no explanation on the payslip of the calculation of that amount, or even a statement of the amount which had accrued during the current week. 117. At para 271 of his witness statement Mr Beal set out the result of that presentation of the RTA scheme on the payslips, as the employed temps were intended to perceive it: “The payslip therefore enabled the Temporary Employee to see that he or she was better off as a result of participation in RTA as the travel allowance represents an extra payment which the employee would not otherwise have received. It is important to distinguish between the travel and subsistence allowances that Reed was entitled to pay free of tax and NICs under the Dispensation … and this£1 a day ‘travel allowance’ which was the mechanism for passing part of the benefit of the Dispensation to the Temporary Employees.” 118. We observe at this point that, while the employed temp might have been able to see that participation in the scheme led to some increase in his or her net pay, it was not possible to discover from examination of the payslip how the adjustment had been determined, nor was any information provided to him or her, in the payslip, the handbook or otherwise, which would have revealed the amounts set out in the dispensation current at the time. When the payslips discussed above were produced, the first dispensation was in effect. It allowed Reed to pay travel expenses to those employed temps using public transport of£5.00 per day in central London, and£1.75 elsewhere, plus a daily subsistence allowance of£3.15 in London and£2.35 elsewhere. As Mr Beal’s explanation reveals, Reed actually offered£1 per day for the travel-to-work payment at this time, regardless of area or distance, and nothing for subsistence. 119. We were also provided with an example of a typical post-April 2001 payslip, that is, one produced during the currency of the revised RTA scheme, and after the second dispensation had replaced the first. By this time the PRP scheme had come to an end. In this case the employed temp earned a gross amount of£354 . To that were added holiday pay of£208.60 , “travel allowance” of£6 and “expenses non-taxable” of£89.04 , followed by the deduction of “exp adj” of£40 , leaving£617.64 . Tax and employee’s NICs deductions reduced the net sum payable to£518.49 . As before, there is a box at the foot of the payslip in which comparative figures are provided. They show that if the employed temp had not participated in the scheme, the net pay would have been exactly the same amount. However, there is no longer any figure for the accrued travel-to-work payment and, if one can take the payslip at face value, the employed temp gained nothing at all from participation in the scheme. We were told that there might have been a computer problem at the time which resulted in the production of incorrect figures. Mr Beal explained that because of a programming error the travel-to-work payment was included in the hypothetical gross pay, whereas it should have been excluded with the result that the advantage should have been the after-tax amount of the travel-to work payment. As this payslip conflicts with every description of the operation of the scheme we are willing to accept that that may be the explanation. 120. However, even those later payslips which showed that participation in the scheme conferred some benefit on the employed temp also showed that the benefit was very modest. A payslip from late 2001, after implementation of the revised RTA scheme (in which the payments were made immediately, rather than accrued), and when, it seems, the computer problem had been resolved, showed that the worker earned total gross pay of£455 which, after adjustments and deductions, resulted in net pay of£342.67 . The comparative calculation indicated that the net pay, without participation in the scheme, would have been£341.58 , a difference of£1.09 . 121. It is not altogether surprising that an employee help-line was necessary as the operation of the scheme was, even on Reed’s own case, difficult to understand. There is a revealing comment in an email sent by Miss Ollerenshaw to a colleague within RR on22 August 2001 , which goes even further: “… the current payslips are misleading to say the least.”
“[The Inland Revenue] have been inundated with calls from employees failing to understand their payslips.… One of the employee’s husband from Reed Health [ sic ] is a financial expert and thinks that deductions to buy shares are being used to pay travel and subsistence expenses. He thinks that large amounts of tax and NIC are dropping down a black hole. He referred to the fact that the payslip refers to an amount that would have been shown on the payslip if not in the expense scheme. He said that he would fax copies of the payslip to me and could I explain by the end of next week what is happening. I have warned both Derek [Beal] and Malcolm [Paget] that the scheme could be revoked retrospectively (potential exposure could be c£10m which I did not mention), could be revoked from today or the least likely outcome would be that a severely toned down version of the scheme could be agreed for the future.” 126. Mr Read and Mrs Kirkham arranged a meeting with RR (Miss Ollerenshaw) which took place on30 November 2001 . They were offered the explanation that the travel and subsistence payments were included in the hourly rate paid to the employed temp, and accordingly reflected in the gross pay for the week. The allowances were then deducted from the salary, in order to reduce the amount subject to income tax and NICs, and then added back as an amount which was payable without deduction of tax or NICs. The further adjustment, designed to reduce the amount actually paid (disregarding the£1.50 or 75p per day) to the amount which would have been received if the employed temp had not participated in the scheme, was mentioned. In fact, as we have said, it represented the aggregate saving in tax and employee NICs which resulted from the employed temp’s participation in the scheme. 127. It is apparent from contemporaneous records, as well as their evidence, that Mr Read and Mrs Kirkham found the explanation they were given to be both surprising and somewhat baffling; our view is that they probably did not understand it. However, Reed emphasises the fact that, then and for some time thereafter, and despite their bafflement, HMRC did not say to Reed that the manner in which it was operating the schemes, or perhaps more accurately applying the dispensations, was incorrect or otherwise unacceptable. Instead, on this occasion, Mr Read asked that the payslips be laid out in a clearer fashion, in order to reduce the number of calls by employed temps to HMRC. The contemporaneous note of the meeting indicates that part of the blame for the lack of clarity was placed upon a computer programme which Reed had purchased but which did not do quite what was intended. 128. We cannot say we are altogether satisfied by that explanation. Miss Ollerenshaw’s note of the meeting at which she had explained the calculations to Mr Paget in January 2001 (see para 115 above) includes what are in our view two telling passages. The first is that “SO showed MP a worked example of the current calculation … and explained which calculations are transparent and which are calculated by the computer and not shown on the payslip.”
“As discussed, the employees who state that they are worse off by having participated in the arrangement, as they would otherwise have been entitled to a higher tax refund are clearly mistaken. They would only be entitled to a higher refund if they had paid the tax in the first place.” 130. We find that remark somewhat surprising, and perhaps an indication of what, as we are bound to say, we considered a blind spot on Miss Ollerenshaw’s part. It is perfectly true that the employees had not paid the tax; but they had suffered a deduction from their pay of the same amount as a consequence of the operation of the scheme (see the worked example at para 112 above, and the commentary which follows). An employed temp who had not participated in the scheme would, ordinarily, be entitled to a tax rebate following a period in which he or she had not worked; an employed temp who had participated and who was later not working would not receive a rebate, even though the latter would have received only the addition of the taxable travel-to-work payment, invariably less than the tax saving of which the benefit accrued exclusively to Reed. It did not seem to us that Miss Ollerenshaw recognised how poor a bargain the schemes were from the employed temp’s perspective. However, her letter seems to have satisfied HMRC for the time being, and there was a period of relatively little contact between RR and HMRC about the dispensations and the schemes. 131. In April 2002, while the third dispensation was in operation, and in part motivated by its concerns about the RTA scheme, Reed replaced it by the Reed Travel Benefit, or RTB , scheme. The major effect of the change was that there was now to be a single adjustment to an employed temp’s pay, which (it was claimed) he or she would know in advance. Ms Ollerenshaw’s evidence was that following the introduction of the RTB scheme she “became more comfortable with the basis on which the Temporary Employees could agree to permanently forgo an element of their pay. They were aware of the formula on which the pay to be forgone was calculated, as they could see from the matrix [see para 137 below] what the deduction could be.”
“How does the RTB differ from the Reed Travel Allowance Scheme? In short, participating in the Reed Travel Allowance Scheme meant that an individual would benefit by receiving an additional 75p or£1.50 per day, depending on the number of hours they worked. The RTB however works differently, in that the benefit to each Temporary/Contractor will depend on their individual Tax and NI circumstances. What do the Temporaries/Contractors need to do? As before, there will be a box on the timesheet for the Temporary/Contractor to indicate if they travel to work by Public Transport as well as a box to complete the number of miles they travel to work if they use their own transport. However an additional box will now be included on the timesheets. This box will need to be completed by the Temporary/Contractor with the number of days in which their day covers a meal break. What do the figures on the matrix mean? This table shows the daily amount by which the Temporary/Contractor is agreeing for their gross pay to be reduced by in order that they can receive the net benefit of participating in the RTB.”
“I wish to claim subsistence allowance for [ ] days” and “My round trip each day averages [ ] whole miles”
“As a Temporary Worker, Reed offers you the opportunity to increase your take-home pay through the Reed Travel Benefit (‘RTB’). The travel benefit has been negotiated with HM Revenue and Customs on your behalf and provides you with a tax- and NI-free travel and subsistence allowance as part of your pay rate. This reduces your taxable and NI-able income and therefore increases your take-home pay. Will I ever receive less pay by being in the RTB? No. On your payslip each week, the Tax, National Insurance and Net Pay that you would have received had you not participated in the RTB will be shown. This will demonstrate that you do not receive less net pay through the RTB and in the majority of cases you will receive more. How do I claim my Travel Benefit? We require you to complete your Timesheet with the information listed below, which enables Reed to calculate your Tax and National Insurance free expense value. To allow Reed to apply the RTB, you will need to make a salary sacrifice reduction to your gross pay. The amount of this reduction will depend on your Tax and National Insurance position.” 136. The “matrix” referred to by Miss Ollerenshaw and in the leaflet given to the temps consultants was further explained by internal guidance provided for Reed’s payroll department. The guidance explained the working of the scheme in this way: “(1) The Temporary Employee’s gross weekly pay is calculated on the basis of the number of hours worked and their agreed hourly rate as if they were not in the scheme. This figure is used to determine which tax/national insurance rate they would pay, and therefore determine their tax bracket on the RTB matrix. (2) Using the tax bracket, and information from the timesheet to ascertain a) whether the Temporary Employee travelled by public or private transport, and b) whether the booking branch was in ‘inner London’ or elsewhere, the daily ‘sacrifice’ is worked out from the RTB matrix. This is then multiplied by the number of days worked, and is the ‘RTB Adj figure’ (i.e. the salary sacrifice); (3) The RTB Adj is deducted from the gross pay. This gives the Total payments; (4) The subsistence and travel expenses which Reed are ‘reimbursing’ the Temporary Employees for the week is calculated from the information on the payslip. Subsistence is payable where a Temporary Employee has worked at least 4 hours in one day. For each working day public transport is a flat rate expense (either London or elsewhere); private mileage expenses are calculated on the number of miles recorded by the Temporary Employee on their timesheet. The total figure is the ‘RTB Expenses TP’; (5) The RTB Expenses TP is deducted from the Total Payments to give the taxable pay. The tax and NIC due on the taxable pay is calculated.” 137. The matrix was provided to the participants, as an annex to a circular letter of22 March 2002 , announcing the replacement of the RTA by the RTB scheme. It was divided into lettered columns and numbered rows, the columns reflecting various possible combinations of tax and NICs liability, the rows the different travel bands—for those working in Inner London, for those using public transport outside London, and for those using their cars. It became possible for an employed temp to determine the gross deduction from his or her pay which would be made. An example was given of an employed temp paying standard-rate tax of 22% and standard NICs of 10%, travelling by public transport outside London, who would fall in box E2 of the matrix and suffer a daily gross deduction of£1.49 . An employed temp earning at a steady rate would be able to see in advance by this means what the deduction would be; another, earning at a fluctuating rate, or returning to work after an interval without work, would almost certainly not be able to do so. It is clear from an examination of the matrix (and would have been clear to any employed temp who took the trouble to examine it) that the deductions were entirely driven by the employed temp’s tax and NICs liability. Indeed, the fact that those who did not pay tax or NICs were excluded should have made it clear that the scheme was primarily a device for saving tax and NICs, and not one whose essential purpose was the payment of expenses in a tax-efficient manner. 138. We did not have a “worked example” of the RTB scheme in the form set out at para 112 above, but did have some sample payslips. One was for a worker who fell within box E2, and it showed gross pay for the week of£225 , from which a deduction, described as “RTB ADJ”, of£7.45 (5 days at£1.49 ) was made, leaving “Total payments” of£217.55 . That figure was also recorded as “Gross pay to date”—the payslip assumed for simplicity that it was the first week of the tax year. The tax and NICs deductions were shown as£13.48 and£8.13 respectively. They were deducted from the “Total payments” to arrive at net pay of£195.94 . As before, there was a box in which was shown what the net payment would have been without participation in the scheme:£225 less tax of£25.58 and NICs of£13.60 , leaving£185.82 . If this sample was typical, the employed temp derived significantly more from the RTB scheme than from its predecessor. Mr Beal’s evidence was that, overall, Reed would take 40% and the employed temp 60% of the benefit. We did not discover whether this ratio was achieved in practice. It appeared that Reed took all of the benefit of the reduction in employer’s NICs. 139. The sample payslip also shows that the “Taxable pay to date” was£170.30 , and that the “RTB NON TAXABLE EXP TP” was£47.25 . That was explained in the circular letter in this way: “The net value of the RTB plan depends on which travel and subsistence rates apply to you and on your individual tax position. The benefit to you comes from the Tax and National Insurance savings that are made because your taxable income is reduced by these tax free amounts. This will be shown on your payslip as RTB NON TAXABLE EXP TP. Reed can confirm categorically that you will not become liable for these Tax and National Insurance savings. If you do not pay Tax and National Insurance, there will be no benefit.”
“1. Reed Health Group does not charge an administrative fee in respect of the RTB. 2. Employees participating in the RTB scheme sacrifice a proportion of their gross salary. A tax-free element in respect of travel and subsistence is then added to the net salary figure. 3. Employees have the option before commencing employment of whether they wish to take advantage of the RTB saving. An employee who decides not to take advantage of the scheme will receive a higher gross salary than an employee who accepts employment on the RTB terms, but the RTB employee will receive a higher net salary due to the tax and NI saving. 4. The salary sacrifice is greater than the tax free element added back to the employees net pay. This is not brought to the attention of the employee by Reed Health Group.” 150. We do not know what was HMRC’s immediate reaction to that information, though it cannot have done much to allay their concerns. 151. Reed ceased to operate the RTB scheme on5 April 2006 , when the revocation of the fifth dispensation took effect, so far as it related to the RTB scheme. Mr Beal’s evidence was that the ending of the scheme caused Reed some commercial damage, particularly because it could not explain adequately to its temporary employees why the scheme had been terminated when it did not itself understand HMRC’s reasons, but that it was not prepared to continue paying the allowances without the assurance which the dispensation had given it that the payments were not subject to tax and NICs. 152. The dialogue between Reed, RR and HMRC continued. Other parts of the dispensation survived (as we have mentioned, the RTA and RTB schemes represented only part of what each dispensation covered) and Reed remained hopeful that the RTA and RTB schemes could be restored to it although, as we shall shortly explain, a rather different scheme was introduced instead. Relations between Reed and HMRC were evidently somewhat strained since by this time it was apparent that HMRC might seek to recover tax and NICs for which Reed had not accounted in the past as, of course, they did, although not until February 2007. It is plain from further email exchanges that there was also some disquiet within HMRC about the history of the dispensations, and the manner in which HMRC had approached them. 153. Reed places particular reliance on an internal email of20 October 2006 whose author, David Stephens of the Central Policy Unit, set out the basic facts as he understood them, and then remarked that “It looks to me like we have cocked-up here. Reed applied for a dispensation and contended that there was an overriding contract of employment. We met with Reed’s tax advisers to discuss the position and raised our concerns as to the employment status of the workers concerned. Inexplicably, we did not ask to see the written contract. It seems to me that there is at the very least an arguable case to be made by Reed that we gave representations (a ruling) to the effect that we too considered that the workers were employees: (what other construction can be put on our agreement to grant the dispensation?!). Under administrative law Reed could have a viable claim against us if, having put all their cards face upwards on the table, they acted on our ruling. NB. Employment status is one of the 5 categories covered by COP 10 in which we will give guidance and will be bound by it (even it turns out later to have been wrong) where all the relevant facts were provided in the sense that the taxpayer put his cards face upwards on the table. We may think it necessary to consult lawyers but I think that Reed may well have a strong case under administrative law that they were entitled to rely on our representation (ruling) that the workers were employees under an overriding contract of employment.”
“1. The Temporary Employee’s employment and continuous employment begins on the date of the commencement of the current assignment. 2. Reed will endeavour to find the Temporary Employee the opportunity to work in the capacity 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. Reed reserves the right to offer any assignment to such temporary employees as it may elect where that assignment is. suitable for several workers. 3. The duration of the Temporary Employee’s employment will be for so long as Reed offers work to the Temporary Employee. It is anticipated that this will be for the duration of the assignment with the Client provided that the Temporary Employee satisfies the Client’s requirements. Reed may instruct the Temporary Employee to end the assignment at any time without specifying reasons.” 158. The conditions went on to provided that wages, “a proportion of which may be Profit Related Pay and Travel Expenses”, were payable only in respect of the hours worked. Reed was obliged to endeavour to find the employed temp work, but it could elect to which of its employed temps it offered any particular assignment. The employed temp was under no obligation to accept any particular assignment Reed offered. Reed and the employed temp were each obliged to give the other notice “in accordance with statutory requirements”
“3. The Temporary Employee’s employment and continuous employment begins on the date of the commencement of the current assignment or secondment. 4. Reed will endeavour to find the Temporary Employee the opportunity to work in the capacity as agreed at registration and specified on the Temporary Employee’s copy of the time sheet where suitable work with a Client is available. Where the Temporary Employee is offered work with a Client, his/her copy of the time sheet will indicate whether this will be on an ASSIGNMENT or a SECONDMENT basis. 5. If the assignment basis applies, the Temporary’ Employee’s services will be supplied to the Client for the duration of the assignment and the common terms of this agreement (paragraphs 1 to 22 inclusive) will apply together with the assignment only terms (paragraphs 23 and 24). If the secondment basis applies Reed will second the Temporary Employee to work under the Client’s direction and control for the duration of the secondment and the common terms of this agreement will apply together with the secondment only terms (paragraphs 25 and 26).… 7. The duration of the Temporary Employee’s employment will be for the duration or likely duration of the assignment or secondment with the Client as notified prior to the commencement of the assignment or secondment provided that the Temporary Employee satisfies the Client’s requirements. Reed may instruct the Temporary Employee to end the assignment or secondment at any time without specifying reasons.…” 165. The essential difference between the assignment terms in paras 23 and 24 and the secondment terms in paras 25 and 26 was that in the former case, it was Reed which was responsible for paying the employed temp’s salary, whereas in the latter it was the client’s responsibility, albeit Reed itself which undertook the calculations. The contract was changed again in October 2004. The only amendment of significance on that occasion was that the contract was expressed to begin at the start of the temporary employee’s first (rather than, as hitherto, current) assignment or secondment. Despite the different arrangements for the payment of salary to those on secondment and those on assignment, it was not suggested to us that there was any material difference relevant to the RTB scheme then being used. 166. Mr Beal made the point, which we accept has some force, that constant changes in the law relating to employment dictated frequent revisions of Reed’s contracts, and that their evolution was driven mainly by employment rather than tax considerations. His view was that, put to the test in an Employment Tribunal, the existing contracts would be interpreted as providing for continuity of employment across assignments, notwithstanding gaps between them, and despite the wording used in them which stated that the employment lasted only until the end of the current assignment. That wording was retained, he said, in order to give Reed an argument it might deploy if necessary. 167. However, by mid-2004 Reed recognised that a provision which might assist it in an Employment Tribunal was putting its dispensation in jeopardy, because of HMRC’s increasing focus on the question whether there was continuity of employment. He learnt from Miss Ollerenshaw that Reed Health (at the time still a separate company, although it too was advised by RR) had recently amended its contracts (this amendment may have coincided with Reed Health’s decision not to engage agency workers in future, though that is not certain) and that the wording used in the amended contracts was clearer than the wording the other Reed companies were then using. It is clear from his first witness statement that by this time Mr Beal was concerned about HMRC’s enquiries into the nature of Reed’s contracts, and he agreed that the wording should be changed even though, he said, he did not think the change would make any practical difference to Reed’s legal relationship with its employed temps. Against that background it is rather surprising that he accepted Miss Ollerenshaw’s suggestion that HMRC be sent a copy of Reed Health’s contract, rather than Reed’s contract, following its amendment. When the amendment was made, it removed the statement that the term of the contract was “for the duration or likely duration of the assignment or secondment”, but did not replace it with anything else—in other words, although the contract identified its start date, it made no provision for expiry. 168. We should add that Mr Beal’s evidence was that none of the Reed companies, including Reed Health (of which he was to become a director later that year), had ever engaged either temporary employees or agency workers on fixed-term contracts, by which he meant contracts which lasted for a set period. When Miss Ollerenshaw sent a copy of the Reed Health contract to HMRC, she included in her letter a statement that fixed-term contracts were not used. It is apparent that she too was using “fixed term” in the same sense as Mr Beal, since by this time she was well aware of HMRC’s view that each assignment represented a separate engagement, and of the consequences for Reed should that view prevail. 169. After the revocation of the fifth dispensation and the discussions which followed the contracts were changed again, as we have said, in a manner which, as Reed understood, made a fundamental difference to HMRC’s perception of the arrangements; the revised terms came into effect in July 2006. The new form of agreement introduced the guarantee of a minimum of 336 hours’ paid work per complete 12 month period to which we have already referred. However, many of the remaining provisions of the earlier contracts were materially unchanged. There was still no guaranteed duration for any assignment; an assignment could be terminated by Reed immediately and without notice; and the employed temp was paid only for the hours worked on the assignment. As before, the contract began at the start of the employed temp’s first assignment, and continued until terminated by either party giving notice (that is, there was still silence about expiry). The notice periods were again the minimum periods required by statute, plus an extra week (to take advantage of an Employment Appeal Tribunal decision which has otherwise no relevance to the present case). Reed was, as hitherto, required to endeavour to allocate suitable assignments to the employed temp (though with no obligation to offer an assignment to either one of two suitable employed temps); in so far as it was unable to do so it guaranteed to pay for a minimum of 336 hours work in each 12 month period, paid at least at the amount of the National Minimum Wage. Now, in the absence of good cause, the employed temp was required to accept offers of suitable assignments (as the quid pro quo for the guarantee of the minimum amount of pay). HMRC’s understanding of the operation of the schemes 170. As we have mentioned, HMRC did not pursue the request for copies of Reed’s contracts with its employed temps and agency workers until July 2004, in the context of a re-examination of the RTB scheme. We are bound to say we found it remarkable that HMRC, despite their concerns about the employment status of those participating in the schemes, left it so long before repeating a request which had first been made several years before, and when they did raise it confined the enquiry to whether Reed engaged agency workers or employed temps on fixed-term contracts. It may well be this concern which deflected HMRC also from enquiring about what, as is now clear, is a critical issue, namely whether the contracts extended over multiple assignments, or there was a separate engagement for each assignment, although it is apparent to us that HMRC did not entirely realise the significance of the point until about 2004. 171. We have dealt above with the considerable concerns HMRC harboured about the layout of the payslips, the confusion they engendered in the employed temps, and the burden of the enquiries directed at HMRC officers. As the evidence relating to these issues showed, several HMRC officers saw the payslips, had them explained and were also provided with details of the information given by Reed to the employed temps. Again, it is surprising, at least at first sight, that HMRC did not fully understand until quite a late stage, it seems at some point in 2005, precisely how it was that Reed was applying the dispensations. If they did not feel confident earlier of their understanding, they could have demanded a more detailed explanation. Mr Read made the comment in his second statement that he could “not understand how a salary sacrifice could be geared to an employee’s tax and NIC rates rather than to the salary itself”
“(1) This section explains what is meant by ‘earnings’ in the employment income Parts. (2) In those Parts ‘earnings’, in relation to an employment, means— (a) any salary, wages or fee, (b) any gratuity or other profit or incidental benefit of any kind obtained by the employee if it is money or money’s worth, or (c) anything else that constitutes an emolument of the employment. (3) For the purposes of subsection (2) ‘money’s worth’ means something that is— (a) of direct monetary value to the employee, or (b) capable of being converted into money or something of direct monetary value to the employee. (4) Subsection (1) does not affect the operation of statutory provisions that provide for amounts to be treated as earnings….” 180. This section encapsulates the dispute between the parties in its simplest form: HMRC say that everything the employed temps received constituted either salary or wages within s 62(2)(a), or emoluments within s 62(2)(c), and, if so, that is determinative of the matter: there is no need to consider anything else. Reed argues that the disputed allowances cannot be “earnings” since they fall squarely within Chapter 3 as “expenses payments” and that, if so, the combined effect of Chapters 2 and 3 is to exclude them from liability for tax and NICs deductions. 181. We do not need to set out ss 63 and 64. Section 63, as is uncontroversial, brings within the benefits code expenses payments falling within Chapter 3; s 64 contains some miscellaneous provisions designed, for example, to exclude double counting. Section 65 is entitled “Dispensations relating to benefits within provisions not applicable to lower-paid employment”
“(l) This section applies for the purposes of the listed provisions where a person (‘P’) supplies the Inland Revenue with a statement of the cases and circumstances in which— (a) payments of a particular character are made to or for any employees, or (b) benefits or facilities of a particular kind are provided for any employees, whether they are employees of P or some other person. (2) The ‘listed provisions’ are the provisions listed in section 216(4) (provisions of the benefits code which do not apply to lower-paid employments). (3) If the Inland Revenue are satisfied that no additional tax is payable by virtue of the listed provisions by reference to the payments, benefits or facilities mentioned in the statement, they must give P a dispensation under this section. (4) A ‘dispensation’ is a notice stating that the Inland Revenue agree that no additional tax is payable by virtue of the listed provisions by reference to the payments, benefits or facilities mentioned in the statement supplied by P. (5) If a dispensation is given under this section, nothing in the listed provisions applies to the payments, or the provision of the benefits or facilities, covered by the dispensation or otherwise has the effect of imposing any additional liability to tax in respect of them. (6) If in their opinion there is reason to do so, the Inland Revenue may revoke a dispensation by giving a further notice to P. (7) That notice may revoke the dispensation from— (a) the date when the dispensation was given, or (b) a later date specified in the notice. (8) If the notice revokes the dispensation from the date when the dispensation was given— (a) any liability to tax that would have arisen if the dispensation had never been given is to be treated as having arisen, and (b) P and the employees in question must make all the returns which they would have had to make if the dispensation had never been given. (9) If the notice revokes the dispensation from a later date— (a) any liability to tax that would have arisen if the dispensation had ceased to have effect on that date is to be treated as having arisen, and (b) P and the employees in question must make all the returns which they would have had to make if the dispensation had ceased to have effect on that date.” 182. The provisions listed in section 216(4) include payments which fall within ITEPA Part 3, Chapter 3. “Lower paid employments” are those in which the gross annual emoluments do not exceed£8,500 , a limit which has been unchanged for many years. We understand that few of Reed’s temporary employees earned less than that amount. That, however, is by the way (even though HMRC believe that the allowances may have been paid to low paid employees, to whom the provisions of the benefit code do not apply by virtue of section 216 ITEPA, a possibility we leave out of account for present purposes). The purpose of s 216 is to exclude various benefits from tax if they are paid to those in lower paid employment; s 65 extends the exclusion to payments covered by a dispensation granted in accordance with its terms, whether or not the recipient is in lower paid employment. 183. It will be observed that s 65 enables HMRC to revoke a dispensation retrospectively. That course has not been adopted in this case; the revocation of the fifth dispensation took effect on6 April 2006 and only prospectively. HMRC’s position is that the payments Reed made did not come within that dispensation or its predecessors, and there is accordingly no need for retrospective revocation. 184. The remaining sections of Chapter 2 are of no present relevance. 185. Section 70 is entitled “Sums in respect of expenses”
“This Chapter applies to a sum paid to an employee in a tax year if the sum— (a) is paid to the employee in respect of expenses, and (b) is so paid by reason of the employment.” 186. It is common ground that if the disputed allowances are payments in respect of expenses at all, they fall within this provision. Section 71 contains explanatory provisions of no application to this case, and it is necessary to pass on to s 72: “(1) If this Chapter applies to a sum, the sum is to be treated as earnings from the employment for the tax year in which it is paid or paid away. (2) Subsection (1) does not prevent the making of a deduction allowed under any of the provisions listed in subsection (3). (3) The provisions are— section 336 (deductions for expenses: the general rule); section 337 (travel in performance of duties); section 338 (travel for necessary attendance) ….” 187. Thus by the combined operation of ss 70(1) and 72(1) payments made by an employer to an employee in respect of expenses are “to be treated as earnings from the employment” (and are known as “Chapter 3 earnings”) and taxed accordingly, subject to relief for deductible expenditure. Sections 336 to 338, which need to be read with s 339, deal with what is deductible expenditure, and are of some importance. Excised of the irrelevant they read: “ 337 Travel in performance of duties (1) A deduction from earnings is allowed for travel expenses if— (a) the employee is obliged to incur and pay them as holder of the employment, and (b) the expenses are necessarily incurred on travelling in the performance of the duties of the employment … 338 Travel for necessary attendance (1) A deduction from earnings is allowed for travel expenses if— (a) the employee is obliged to incur and pay them as holder of the employment, and (b) the expenses are attributable to the employee’s necessary attendance at any place in the performance of the duties of the employment. (2) Subsection (1) does not apply to the expenses of ordinary commuting or travel between any two places that is for practical purposes substantially ordinary commuting … 339 Meaning of ‘workplace’ and ‘permanent workplace’ (1) In this Part ‘workplace’, in relation to an employment, means a place at which the employee’s attendance is necessary in the performance of the duties of the employment. (2) In this Part ‘permanent workplace’, in relation to an employment, means a place which (a) the employee regularly attends in the performance of the duties of the employment, and (b) is not a temporary workplace. This is subject to subsections (4) and (8). (3) In subsection (2) ‘temporary workplace’, in relation to an employment, means a place which the employee attends in the performance of the duties of the employment— (a) for the purpose of performing a task of limited duration, or (b) for some other temporary purpose. This is subject to subsections (4) and (5). (4) A place which the employee regularly attends in the performance of the duties of the employment is treated as a permanent workplace and not a temporary workplace if— (a) it forms the base from which those duties are performed, or (b) the tasks to be carried out in the performance of those duties are allocated there. (5) A place is not regarded as a temporary workplace if the employee’s attendance is— (a) in the course of a period of continuous work at that place— (i) lasting more than 24 months, or (ii) comprising all or almost all of the period for which the employee is likely to hold the employment, or (b) at a time when it is reasonable to assume that it will be in the course of such a period. (6) For the purposes of subsection (5), a period is a period of continuous work at a place if over the period the duties of the employment are performed to a significant extent at the place ….” 188. The parties agree that while this section defines the distinction between permanent and temporary workplaces, and in particular is the source of the 24-month time limit referred to in the dispensations, and is therefore of some significance, it does not itself provide an answer to the question whether the employed temps had single, continuing contracts, or engagements lasting only for the duration of each assignment. The issues 189. Before the hearing began the parties identified a number of issues, and provided us with a list. As the hearing proceeded it became apparent that some modest reformulation of the issues would make them clearer, and also that it is neither desirable nor, we think, possible to approach the issues as presented, in the form of discrete questions. There is considerable overlap between them, and some cannot be effectively answered without considering one or more of the others at the same time. As will become clear, we have broken down the matters we must decide in a rather different manner, essentially as factors leading to an overall conclusion on the principal issue, that is whether (leaving legitimate expectation to one side) HMRC are right in their view that the allowances were not covered by the dispensations, and may recover the tax and (assuming the outcome is the same) the NICs for which Reed had not accounted during the relevant period. 190. Nevertheless, we recognise that we should provide answers to all the questions raised by the parties which do not become redundant by reason of the answer to another question (save that, as we have mentioned, we do not propose to decide whether we have the jurisdiction to determine questions of legitimate expectation and are not required at this stage to decide whether the outcome for NICs is the same as for tax, the subject of issue 9). Even though we have decided upon a different approach the issues identified by the parties are a convenient starting point. As reformulated by us, and with some added explanation, the questions we must answer are as follows: A: Basis of charge 1. Did those of the employed temps who received payments under RTA or RTB: (a) enter into an effective salary sacrifice, with the consequence that Reed paid them a reduced salary plus the allowances; or (b) receive only a salary? It is common ground that if the answer to question 1 is (b), everything Reed paid to its temporary employees was earnings within ITEPA Part 3 Chapter 1 and (subject to the answer to question 7) we must decide these appeals in favour of HMRC, leaving Reed to pursue such other remedies as it may have elsewhere. 2. If the answer to question 1 is (a), were the allowances: (a) nevertheless earnings under ITEPA Chapter 1 (and in particular section 62); or (b) sums to be treated as earnings under ITEPA 2003 Chapter 3 (and in particular section 72) as reimbursement of expenses? In fact, HMRC put this question a little differently, by arguing that what was paid by way of allowances was nothing more than Chapter 1 earnings, within ITEPA s 62, dressed up as expenses; Reed counters that reimbursements of home to work travel expenses are not Chapter 1 emoluments as a matter of general principle (whether the workplace is temporary or permanent), and cannot be brought within the charge to tax by Chapter 1 but only as a reimbursement of expenses, falling within Chapter 3, and in particular s 72. B: Availability of deductions 3. Did the employed temps travel from their homes to: (a) temporary or (b) permanent workplaces for the purposes of ss 338 and 339 of ITEPA? It is agreed that if the workplaces were temporary, a deduction from earnings is allowed in respect of the travel and subsistence payments, pursuant to section 338(1). If they were permanent, it is agreed that no such deduction from earnings is allowed, under section 338 or otherwise. We add for clarification that even if a deduction is allowable, it does not necessarily follow that the allowances fell within Chapter 3 or, if they did, that they were covered by the dispensations. To answer question 3 it is necessary to address two subsidiary issues: (i) were the employed temps engaged under what may be termed an “overarching” contract of employment with Reed (that is, a contract that continued beyond the conclusion of any particular assignment until terminated by notice), or under a succession of “job-by-job” contracts? (ii) If the employed temps were engaged under a succession of “job-by-job” contracts, did each employed temp have only a single “employment” with Reed within the meaning of ss 338 and 339 of ITEPA? C: Scope and effect of the dispensations Issues 4, 5 and 6 arise only if the allowances were earnings within Chapter 3 (that is, if the answer to question 1 is (a) and the answer to question 2 is (b)). If the answer to question 1 is (a) but the answer to question 2 is also (a), with the consequence that the allowances were earnings under Chapter 1, the outcome of the appeal will be determined by the answer to question 7 below. 4. Can an inspector lawfully grant a dispensation in relation to payments which are chargeable to tax and, if so, what conditions, if any, must be satisfied in order for him to do so? 5. If the answer to question 4 above is yes, did the dispensations cover the allowances? That is to say, were HMRC “satisfied”, in the manner required by s 65, in respect of the allowances that no additional tax was payable by virtue of the “listed provisions” of the benefits code (as defined in ITEPA s 63)? 6. If the answer to both question 4 and question 5 is yes, what is the effect of a dispensation as a matter of law? In particular: (a) Does a dispensation relieve the employer of any obligation to deduct tax under PAYE that might otherwise arise (and if so in what circumstances)?; or (b) Does a dispensation remove only any obligation that would otherwise arise under the PAYE regime to return details on form P11D of certain expenses and benefits paid to employees (and if so in what circumstances)?; or (c) Does a dispensation remove any income tax charge (including any liability to deduct under PAYE) that would otherwise arise under the listed provisions (and if so in what circumstances)? D: Legitimate expectation 7. Did Reed have a substantive legitimate expectation that (a) the allowances would not be subject to income tax or NICs under any provisions; (b) the dispensations would not be revoked retrospectively in the absence of serious and material misrepresentations; and (c) if the dispensations were not revoked retrospectively, HMRC would not seek tax or NICs retrospectively (from Reed or its employees); and: (a) if so, to what extent? (b) if and to the extent that Reed had any substantive legitimate expectation, what are the consequences for the statutory appeals before this tribunal? For the reasons we have given (see para 13 above) we shall confine ourselves to making findings of fact on this issue. E: Practical consequences 8. In the light of the answers to the preceding issues, were Reed, as employers, under an obligation to make a PAYE deduction in respect of the allowances during the relevant period? 9. Does the outcome for NICs in these appeals follow the outcome for tax? The answer to issue 8 is wholly dependent on the answers to preceding issues, and does not demand separate examination. As we have said, we are not required at this stage to deal with issue 9, which we set out only for completeness. 191. We add, for clarity and again to avoid unnecessary repetition, that Mr Clarke QC and Mr Tolley addressed us on issues of employment law for Reed and HMRC respectively, while Mr Ewart QC and Mr Gammie QC dealt with the taxation issues. Issue 1 : did the employed temps make an effective salary sacrifice? 192. As the comments we have added to the list of issues indicates, this is the core issue and, if we decide it in favour of HMRC, it is determinative of the appeals. An important preliminary point, not separately identified in the list of issues although it was a matter of controversy, is whether the RTA and RTB scheme adjustments, whether or not they constituted an effective salary sacrifice, and whatever the correct view of their consequences for tax and NICs purposes, were incorporated into the employed temps’ contracts at all. Reed’s submissions 193. Reed argues that the resolution of this issue requires no more than an answer to a single, simple question: did the contract between Reed and the employed temps who participated in the RTA and RTB schemes provide for payment only of a salary, albeit part of it was described as an allowance for travel and subsistence, or, instead, for payment of a salary plus an allowance of an amount agreed with HMRC? It concedes that the contracts themselves did not include any provisions about the salary sacrifice which it says the employed temps made, but maintains that the handbooks (and other communications with the employed temps, such as the information they were given on recruitment) made it clear that they would be paid on the basis of the current scheme unless they opted out. Each scheme had as its core feature the computation of the employed temp’s salary by the application of an agreed process to the “headline” wage (the hourly rate multiplied by hours worked) and the provision of a travel and subsistence allowance in amounts agreed with HMRC. Crucially, says Mr Clarke, unless they opted out the employed temps were never contractually entitled to the “headline” wage, but only ever to the wage found by the operation of the current scheme, plus a reimbursement of expenses. 194. It does not matter, he says, that the contracts themselves did not spell out the detail of the schemes; the material set out in the handbooks, in letters sent to the employed temps and on the timesheets together with, importantly, what they were told on recruitment were all terms apt for incorporation into individual contracts of employment, and were so incorporated, both by the fact of their communication to the employed temps and by the parties’ conduct. That conclusion was reflected in the fact that, consistently over a period of several years, the employed temps’ payslips showed that they were paid in accordance with the schemes. There is, moreover, ample judicial authority supporting the proposition that material outside a contract of employment may be incorporated within it: see, for example, Aspden v Webbs Poultry & Meat (Holdings) Ltd[1996] IRLR 521 and Carmichael v National Power plc[1999] ICR 1226 , in which Lord Hoffman observed, at p 1233, in relation to the rule about the construction of documents, that “It applies in cases in which the parties intend all the terms of their contract (apart from any implied by law) to be contained in a document or documents. On the other hand, it does not apply when the intention of the parties, objectively ascertained, has to be gathered partly from documents but also from oral exchanges and conduct. In the latter case, the terms of the contract are a question of fact. And of course the question of whether the parties intended a document or documents to be the exclusive record of the terms of their agreement is also a question of fact.” 195. In Malone v British Airways plc[2011] IRLR 32 the Court of Appeal decided that the touchstone of incorporation is whether the relevant provision impacts on the working conditions of the employee. Since there is nothing more fundamental to an employee than his pay, terms which impact upon his pay on a regular basis must satisfy Lord Hoffman’s test as it was explained in Malone . That the informal incorporation of a term into a contract is possible is demonstrated by Petrie v Mac Fisheries Ltd[1940] 1 KB 258 , in which the court found that a notice about sick pay posted on a factory notice board had contractual effect. Custom, or long practice, had a similar result, as in Harlow v Artemis International Corporation Ltd[2008] IRLR 629 , in which the making of enhanced redundancy payments was found by the court to have become a term of the contracts of all employees, because of both prior conduct and custom and practice. 196. Once it was accepted that those employed temps who did not opt out had contracted to be paid in accordance with the terms of the current scheme, it necessarily followed, since it was the essential feature of the schemes, that they had agreed to forego part of what would otherwise have been salary, in order to receive a different payment in a different form. That, says Mr Clarke, is all that is necessary for a salary sacrifice to be effective: the question is not one of form, but one of substance. If the effect of the contractual arrangements in which the employed temps acquiesced over several years was as Reed maintained, nothing more was required. HMRC’s submissions 197. HMRC’s case is that Reed’s employed temps did not enter into a salary sacrifice, still less an effective salary sacrifice, at any time while the RTA and RTB schemes were in operation. The disputed allowances, whatever Reed may have called them, and however they might have been described in the handbooks, were simply a component of the employed temps’ contractual wage or salary, falling within and to be taxed as Chapter 1 earnings, and not as Chapter 3 expenses. Mr Gammie referred us to some authorities on the meaning of the words “wage” and “salary”, but as Mr Ewart did not disagree with the proposition that what was paid to the employed temps (leaving aside the travel-to-work payment which, as both parties agree, fell within Chapter 3 and was always subject to tax and NICs) was Chapter 1 salary unless Reed could demonstrate that it was something else, we need not deal with those authorities. 198. HMRC do not deny that it is open to an employer and employee to agree to employment terms under which the employee agrees to work in future for a reduced salary or wages (by making a salary sacrifice) in return for some benefit, whether or not monetary. However, if a salary sacrifice is to be effective for tax purposes (thus becoming an “effective salary sacrifice”) the employee must actually agree to work in future for the reduced salary or wage, and the employer must provide some other benefit in a form which is not readily convertible into money. In other words, there is, they say, no effective salary sacrifice if all the employer does (with or without the employee’s consent or agreement) is to pay part of the employee’s contractual salary or wage in some other form, in particular by meeting, or purporting to meet, some or other of the employee’s expenses. 199. Here, Mr Tolley argues, the purported salary sacrifice was ineffective because it was not incorporated in the temporary employees’ contracts with Reed; alternatively, if it was incorporated, it was not implemented. As a further alternative he says that, should we decide in Reed’s favour in respect of issue 3 (that is, we should conclude that there were continuing rather than job-by-job contracts) there was no effective variation of the contracts. That argument is, we think, little more than a supplement to the first, and it would in any event not apply to those who joined (or re-joined) Reed after the schemes had been introduced. 200. HMRC first point to the fact that the contracts between Reed and the employed temps did not contain any reference to a salary sacrifice or similar arrangement, at least until the comprehensive change of the scheme which took place in 2006 (and HMRC reserve their position in respect of this change, which of course is not the subject of these appeals). They recognise that something was said in the handbooks and (as we have found as a fact) that the temps consultants offered an explanation, even if, HMRC say, an inadequate (because it was intentionally incomplete) explanation, as new employed temps were recruited, but argue that if conditions are to be incorporated it must at the least be a reasonable inference from the circumstances that the parties intended the contents of the extraneous documents in which they were set out to have contractual effect. And they must be capable of having contractual effect: that is not possible if the documents are written in vague terms, or merely express an aspiration. 201. For the latter proposition HMRC rely on the observation of Auld LJ in Keeley v Fosroc International Ltd[2006] IRLR 961 at p 966: “it does not necessarily follow that all the provisions are apt to be terms of the contract as some provisions, read in their context, may be declarations of an aspiration or policy falling short of a contractual undertaking ... It is necessary to consider in their respective contexts the incorporating words and the provision in question incorporated by them.” 202. Here, not only was there insufficient evidence from which one might infer an intention to incorporate provisions found outside the four walls of the contracts, the available evidence pointed to the conclusion that there was no such intention. Until the 2004 revision, Reed’s contracts with its employed temps were expressly said to set out their entire terms. They were entitled “Conditions of Employment” and made no reference at all to the handbooks or any other communications. The 1999 version of the contract (as it was printed on the reverse of the timesheets then in use) was quite clear: it stated that “the conditions below, together with the details of your assignment on the front of this copy, contain full details of the Terms and Conditions of your assignment”
“In the employment income Parts ‘employment’ includes in particular— ( a ) any employment under a contract of service, ( b ) any employment under a contract of apprenticeship, and ( c ) any employment in the service of the Crown.” 254. The term “includes” leaves open the possibility that there are other types of employment falling within the definition although it is difficult to think what these might be, and we do not think it necessary to speculate. Reed’s submissions 255. Mr Clarke’s principal point is that HMRC’s pleaded case did not reflect the correct analysis, since it did not properly distinguish between an engagement that gave rise to a contract of employment during the currency of a single assignment, and a contract of employment which persisted beyond the end of the assignment in question. Whether or not a worker has the status of employee will “need to be resolved as a question of fact according to the particular circumstances of each case”: see McMeechan v Secretary of State for Employment[1997] IRLR 353 at para 35. Nevertheless, says Mr Clarke, while the fact-finding exercise is important it cannot displace the usual approach to the construction of contracts. He emphasises that the contracts in use here described themselves as contracts of service, a term treated as synonymous with a contract of employment. He referred us to an observation of Lord Denning MR in Massey v Crown Life Insurance Co[1978] IRLR 31 at para 13 (echoed by Lawton LJ at para 27) that “If the true relationship of the parties is that of master and servant under a contract of service, the parties cannot alter the truth of that relationship by putting a different label upon it.”
“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.” 276. We summarise the terms of Reed’s employment contracts that we consider to be relevant to this issue: · The 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. · Payment was for hours worked only. · 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. The employed temp was not under an obligation to accept any assignment Reed offered. · “The Temporary Employee is entitled to paid annual leave in accordance with the Regulations.”
“(3) If the Inland Revenue are satisfied that no additional tax is payable by virtue of the listed provisions by reference to the payments, benefits or facilities mentioned in the statement, they must give P a dispensation under this section. (4) A ‘dispensation’ is a notice stating that the Inland Revenue agree that no additional tax is payable by virtue of the listed provisions by reference to the payments, benefits or facilities mentioned in the statement supplied by P.”