Court rules travel expenses are subject to tax

Reed Employment has lost an appeal against HM Revenue and Customs (HMRC), in which it contested up to £158 million in tax payments relating to travel expenses for the temporary workers it employed.

The case covers the period between 2001 and 2006 when the employment agency aimed to make non-taxable payments to its employed temps for travel expenses, with the tax and national insurance (NI) contributions shared between Reed and the temporary worker.

In the case of Reed Employment vs HMRC, HMRC argued that the expenses were made as part of overall wages and should therefore have been subject to pay-as-you-earn (PAYE) and NI contributions. 

Reed argued that the employer could not now be expected to pay NI and PAYE on the expense reimbursements because HMRC had originally allowed the arrangement.

In April 2014, the Upper Tribunal endorsed a First-Tier Tribunal judgement that found in favour of HMRC.

Reed lodged an appeal contesting the tribunal’s ruling. The appeal was dismissed by the Court of Appeal following a hearing in July 2015.

Ruth Owen, director general of personal tax at HMRC, said: “This shows that we were right to challenge the complex arrangements that Reed used to try to reduce its income tax and national insurance liabilities, and that we won’t hesitate to litigate cases if necessary to secure the tax due.”

Reed stated: “We are extremely disappointed by the decision of the Court of Appeal in this case, which involved complex issues and which we lost on a technical point on the wording of our contracts with our temporary employees.

“We stress that this is a historical tax dispute, covering a period from 2001 until 2006 and will not have an impact on our clients or our temporary employees past and present. We will be working with HMRC to take the matter forward.”

Tim Stovold, head of tax at accountancy firm Kingston Smith, added: “Normally, business travel expenses can be reimbursed to employees without tax and NI being charged.”

“But the problem with the Reed case was that the expense reimbursements were viewed as part of the normal earnings of the employee rather than an expense reimbursement in addition to earnings.

“From 6 April 2016, the law applying to reimbursed business expenses is changing so that this type of arrangement, now to be known as a ‘relevant salary sacrifice arrangement’, is prohibited by law.

“Employers who do anything other than reimburse business expenses in a very straightforward way will need to review their procedures.”