In the recent case of Reed Employment, the First-tier Tax Tribunal found the Reed group of companies liable for £158 million of tax and national insurance following a failed salary sacrifice arrangement. The case is a salutary warning for all employers either operating or thinking about introducing salary sacrifice schemes to take great care to ensure that they are robust and consistent with HMRC’s requirements.
The Reed Employment group of companies is an employment business or agency which provides temporary employees to client businesses, usually on a short term basis. Between 1998 and 2006, Reed operated a ‘salary sacrifice’ ar-rangement involving around 500,000 temporary workers which was designed to take advantage of the tax provisions allowing certain employees to claim deductions against earnings for travelling and subsistence expenses. The primary benefit of the arrangements accrued to Reed, in the form of significant NIC savings.
Broadly, the basis of the arrangement was that temporary employees would sacrifice a sum of earnings in exchange for the payment of a tax free allowance to reflect their travelling and subsistence expenses. HMRC took the view that Reed’s contracts with the temporary employees did not provide for an effective salary sacrifice, and there was no such sacrifice as a matter of fact. Accordingly, the allowances did not represent a reimbursement of expenses, but were simply part of the employees’ taxable earnings. Separately, HMRC argued that even if the allowances were paid in respect of expenses, those expenses were not deductible because of the nature of the temporary workers’ employment status.
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