The Court of Appeal has dismissed an umbrella company’s appeal against determinations issued by HM Revenue and Customs (HMRC) in respect of Income Tax (IT) and National Insurance Contributions (NICs), finding that the company did not have overarching contracts of employment with its workers.

The workers engaged by the company worked mainly in education, health and social care. The company had contracts with employment agencies, which in turn had contracts with organisations such as schools and hospitals. It contended that it had continuing contracts with its workers and each assignment was therefore a temporary workplace, meaning that the reimbursement of travel and subsistence expenses was deductible from the workers’ income for IT and NICs purposes. It also claimed that it was entitled to reimburse such expenses using benchmark rates rather than requiring workers to provide evidence of their expenses, even though it had not obtained a dispensation under Section 65 of the Income Tax (Earnings and Pensions) Act 2003.

HMRC’s case was that each assignment was a separate employment involving attendance at a permanent workplace, so that travel and subsistence expenses were not deductible at all. Even if they were deductible, the company was not entitled to use benchmark rates without a dispensation. HMRC issued determinations in respect of IT and NICs on the basis that the expenses were not deductible. The company appeal to the First-tier Tribunal (FTT).

The FTT concluded that each assignment was to a permanent workplace and the expenses were therefore non-deductible. It also found that, without a dispensation, there was no automatic entitlement to deduct the expenses. It accepted that the loss of tax in the first two relevant tax years had been brought about carelessly and the six-year time limit for assessment under Section 36 of the Taxes Management Act 1970 therefore applied. The determinations for those years were thus valid despite having been issued after the standard four-year deadline. The company appealed unsuccessfully to the Upper Tribunal (UT).

Ruling on the company’s further appeal, the Court rejected the argument that the FTT and the UT had erred in law in applying the wrong test to decide whether two discontinuous periods of work were part of the same employment. The correct analysis was that there was intermittent employment when a worker was on an assignment, and no employment at all in the gaps between assignments. The employments were successive employments.

Considering whether the company had acted carelessly in bringing about the loss of tax, the Court observed that the loss of tax in this case was that part of the workers’ pay had been treated as tax free when it should have been subject to the deduction of tax. The company had not taken reasonable care to ensure that the contracts with its workers were overarching contracts, but had nevertheless reimbursed the expenses free of tax as if they had been. Had it taken reasonable care, the loss of tax would have been avoided. The appeal was dismissed.