A sacrifice worth making?

A tax case “related to the income tax and national insurance contributions implications of payments made under two schemes in respect of the travel and subsistence expenses of its temporary employees.”

“The dispute concerns the treatment of three different categories of payment which were made namely: (1) payments in respect of mileage undertaken by the participants in going to and from their temporary places of work by car, motorcycle or bicycle; (2) payments in respect of expenses incurred by the participants in going to and from their temporary places of work by public transport; and (3) payments in respect of expenses incurred by the participants on food and drink while they were away from home in the course of their employment…[the taxpayer] considered that it did not have to account for income tax or NICs on any of the above payments because, in the case of the payments in respect of mileage, the payments were exempt and because, in the case of the other two categories of payments, the payments fell within the terms of a dispensation”. The payments were provided under a salary sacrifice.

The case looked at multiple points of contention, firstly whether there was a valid salary sacrifice as HMRC contended the “contract did not contain valid provisions to the effect that the participant would give up salary in return for the payments in question because the terms on which that was to occur were too uncertain to be binding on the parties.” In addition, whether the payments were round sum allowances as “they were made regardless of whether the mileage or expenses to which they purportedly related were actually incurred. The Respondents say that, in effect, each payment was not intended to be a genuine estimate of the expense to which it purported to relate”.

On the salary sacrifice point, tribunal determined the sacrifice was valid stating “It is apparent from the authorities that a contractual term which the parties intend to be contractually binding and whose overall effect is explicit but whose detailed terms are incomplete should be given effect by the courts.” They concluded that “We agree that the participants were not made aware of the detailed terms on which the salary sacrifice would operate but that is no different from the clawback provision in Openwork or the option to buy standards in Hillas and, in both cases, the relevant court considered that the relevant provision should be upheld and sought to give effect to its terms. In this case, it was apparent from the written terms of the contractual documentation that the amount of salary that each participant would be required to sacrifice would be greater than the amount of the payment which the participant would receive in respect of mileage, subsistence expenses or public transport expenses and that an entitlement in respect of mileage, subsistence expenses or public transport expenses would be carried forward in circumstances where payment of that entitlement and the consequent adjustment to salary would take the participant below the NMW. It is possible that, had a court been asked to resolve a contractual dispute between…a participant as to a point of detail such as whether or not [the taxpayer] was entitled to apply a de minimis in calculating the payment to be made in any week in respect of a participant’s entitlements or entitled to write off the overall carried forward pool of entitlements at a particular time, the court might have had difficulties in determining whether or not those were part of the terms on which the salary sacrifice was agreed. However, to quote Lord Wright in Scammell and Leggatt J in Astor, those are simply difficulties in interpreting the relevant terms. In this case, we do not have to consider the answers to those questions for the simple reason that there never was a dispute between the parties in relation to the terms of the salary sacrifice. Those difficulties in relation to the details do not mean that the salary sacrifice as a whole was too vague to be a valid and binding contractual term.”

On round sum allowance, HMRC contended that “inadequacy of the checks relating to each of the 3 categories of payment meant that there was an insufficient causal link between, on the one hand, the incurring of the mileage, subsistence expenses or public transport expenses which were necessary to give rise to payments under the scheme”. It was found that “a defective system can in some cases negate a stated intention to ensure that payments were made only in circumstances where mileage or expenses were actually incurred but that that will not be the case for all defective systems”. HMRC were successful with respect to subsistence payments, stating the “felicitous correlation does not alter the fact that, when the subsistence payments were made, [the taxpayer] did not have the requisite intention to create that equivalence because it could not know which of the recipients were entitled to the payments for the simple reason that it had ignored the answer to that question in the registration form”. This contrasted with their view of the public transport payment “the relevant payments were made a flat daily rate and without regard to the public transport expenses that were actually incurred. Whilst that is a matter to be considered at the stage when Issue Three and Issue Four fall to be addressed, we do not see ?how it can be said to discredit the stated intention to make such payments only in circumstances where public transport expenses were actually incurred. As such, we agree with [the taxpayer] that the public transport payments were intended to be made only in circumstances where public transport expenses had actually been incurred and were not round sum allowances.”

The conclusion was added to for the mileage, which was said “the system did not identify when a participant spent the night away from home while on assignment, travelled to and from work indirectly or travelled to and from work from or to an address other than his or her home address. In addition, it did not deal properly with cases where there was a mixed mode of transport or a change in the usual mode of transport on an ad hoc basis. In addition.. there were also defects in the audit process ranging from the poor response rate, the lack of sanctions for failure to comply with the audit process and the failure to make retrospective adjustments to entitlements by reference to what had been reported on the ERF. As such, there will inevitably have been cases where a mileage payment was made in circumstances where the mileage in question had not actually been incurred.” However, surprisingly, tribunal concluded “that does not necessarily compel the conclusion that the payments in question were round sum allowances. The question which we need to address is whether those defects were so egregious that, when considered in the round as part of the evidence as a whole, they demonstrated an absence of any genuine intention on the part of [the taxpayer] to confine the mileage payments to circumstances where mileage was actually incurred.”

The argument was then on next steps, specifically where the payments are not deemed round sum allowances, how they should be treated. HMRC argued “since the circumstances in question arose as a result of defects in the system, as opposed to isolated human error, they could not be dismissed as de minimis without…identifying the specific payments which had been made in the relevant circumstances. In other words, [the company] could not simply allege that, on the balance of probabilities, a significant percentage of the payments made under the scheme were likely to relate to mileage or expenses that were actually incurred because [the company] had not demonstrated which of the payments had been affected by the errors in the system. The onus was on [the company] to show, in relation to each payment, that that particular payment related to mileage or expenses that had actually been incurred.”

The FTT concurred with this view stating “a significant proportion of the mileage and public transport payments were likely to have related to mileage or public transport expenses that were actually incurred…However, it is one thing to reach the conclusion that, on any one day that a participant worked, subject to the limited circumstances where there was direct evidence to the contrary, the system was likely to have given rise to mileage and public transport payments of the correct amount. It is quite another to conclude that, on that basis: (1) the circumstances in which mileage or public transport payments did not relate to mileage or public transport expenses that were actually incurred were so rare that they can simply be disregarded as de minimis; or (2) a specified proportion of each category of such payments which should be regarded as relating to mileage or public transport expenses, as the case may be, that were actually incurred can be determined.” They added “In view of all of those uncertainties….we cannot see how it is possible for us either to conclude that the circumstances in which mileage or public transport payments did not relate to mileage or public transport expenses that were actually incurred were so rare that they can simply be disregarded as de minimis or to determine that a specified proportion of each category of such payments should be regarded as relating to mileage or public transport expenses, as the case may be, that were actually incurred. Instead, we consider that the onus is on [the taxpayer] to establish that a particular mileage or public transport payment related to mileage or an expense that was actually incurred. We recognise that, particularly given the time that has elapsed since the BSS operated and the number of mileage and public transport payments which were made under the scheme, this may well be an impossible task but we can see no other way on which this issue can be addressed based on the evidence provided to us.”

The next question was whether the dispensation could enable the payment to fall outside the scope of tax “even if a payment under the scheme was not a round sum allowance and related to subsistence or public transport expenses actually incurred, that would still have given rise to an obligation to withhold and account for income tax and NICs unless the payment in question fell within the terms of the dispensation”. HMRC argued that “the subsistence and public transport payments which had been made in this case clearly fell outside the express terms of the dispensation. That is because, when one looked at those terms, it was clear that the system and audit failures in this case were fatal to [the case]. The dispensation on its face said that the only employees covered by paragraph B of the dispensation were those whose “claims [were] independently checked and authorised by another person”. The taxpayer considered that “In response, [the taxpayer] agreed that language used in the dispensation to the effect that claims had to be independently checked and authorised by another person needed to be read in the context of the correspondence which preceded the issue of the dispensation. However, he submitted that it was apparent from that correspondence that the Respondents had clearly accepted that the system of declaration at the registration stage, followed by a retrospective notification by the participant in the event of a change in facts, and payment based that information coupled with the timesheets produced by the clients, complied with the terms of the dispensation”.

Tribunal agreed with HMRC stating “Paragraph B of the dispensation said that the employees covered by the dispensation were employees “whose claims are independently checked and authorised by another person”. Clearly that language on its face envisaged a situation where claims were made after the day on which the relevant expense had been incurred and then subsequently subjected to check and authorisation and, equally clearly, that was not the case here”. Tribunal added that “[the taxpayer] assured [HMRC] that “rigorous procedures will be adopted to ensure that employees have incurred expenses”. It was on the basis of those assurances that [HMRC] was able to persuade [HMRC] to issue the dispensation. However, it is apparent from the facts set out above that that is not how matters transpired in relation to the scheme and, for that reason, we do not see how participants who received subsistence or public transport payments can properly be said to fall within paragraph B of the dispensation as that paragraph is required to be construed in the light of the correspondence.”

Tribunal concluded by stating “the appeals fail except to the extent that that they relate to those mileage payments which [the company] is able to show relate to mileage that was actually incurred and therefore fall within the exemptions in Section 229 of the ITEPA and Regulation 22A of the SS(C)R 2001).”

The Best Connection Group Limited v The Commissioners for HMRC - Find Case Law - The National Archives