Written by Richard Rowell
Published on February 4, 2012

Recruitment agency Reed could be liable for a tax bill of more than £150 million after it lost a tribunal appeal over a salary sacrifice scheme for its temporary workers.

People Management reports:

The case concerned travel and subsistence payments Reed made to 500,000 agency staff between 2001 and 2006, through a salary sacrifice scheme that the tribunal ruled was not valid.  HM Revenue & Customs is now pursuing £158 million in unpaid taxes and interest - although Reed disputes this figure and is planning to appeal the decision.

Reed claimed that their temps were employed on a single contract, covering them to work at multiple client locations, and qualifying them for travel contributions that were not taxable.  

But HMRC argued that each assignment constituted a separate workplace, and temps would therefore incur ordinary commuting costs that were not tax-deductible expenses. It also maintained that a salary sacrifice scheme was not an effective one if an employer reduced salaries but paid the remainder in another form, such as ineligible expenses.

The first tier tax tribunal subsequently ruled in HMRC's favour. It agreed that each assignment represented a separate contract of employment, and that the salary sacrifice scheme was not a valid one as workers could opt out.

The tribunal also noted that many Reed temps would have been unaware they were giving up part of their salary through the arrangement, because of the confusing description in their staff handbooks.

Responding to the ruling, a statement from Reed said: We are extremely disappointed with the decision taken by the tax tribunal and we will be appealing.

We would like to clarify that this is a dispute between HMRC and Reed Group, and this case does not have an impact on temporary workers past or present. There has also been no decision taken on the size of the claim, and Reed Group disputes the figure proposed by HMRC.

The fact that Reed operates as an employment agency added to the complexity of the case, which took nine months to conclude.

But all employers should be mindful of the implications of the ruling, warned accountancy firm MHA MacIntyre Hudson. Its employment tax director Alastair Kendrick, said: This case is a reminder to those who have entered into salary sacrifice arrangements with their employees - it is essential that there is a change in the employees' contractual position.

HMRC announced back in 2009 that it would be targeting recruitment agencies that misused tax concessions for temporary workers.