Businesses are being urged to review their salary sacrifice and car allowance schemes after a Court of Appeal decision. 

One of the UK’s largest employment agencies, Reed Employment, was found liable in 2012 for up to £158 million of unpaid tax.

It had claimed that payments made to cover lunch and commuting for about 500,000 temporary employees between 1998 and 2006 were part of a salary sacrifice arrangement.

However, a first-tier tribunal disagreed, saying that Pay As You Earn (PAYE) and National Insurance Contributions (NICs) should have been paid on the entirety of its employed temps’ salaries between 1998 and 2006.

Reed lodged an appeal with the upper tribunal, but the courts again found in favour of HM Revenue and Customs (HMRC), last year. 

Undeterred, Reed took its case to the Court of Appeal, but it has now backed both earlier decisions, ruling in favour of HMRC. 

The company operated the Reed Travel Allowance (RTA) scheme from 1998 until April 2002, when it was replaced with the Reed Travel Benefit (RTB) up until April 2006.

However, both were flawed. The three judges hearing the appeal said: “The supposed sacrifice under the RTA scheme was matched by a corresponding gain, so that there was no true sacrifice.

“The RTB scheme was different; the sample payslips produced to us show that the amount sacrificed was not the same as the amount gained, but in some cases was higher and in others lower.

“In our view, a salary sacrifice implies reciprocity: the employee gives up a portion of his or her earnings, even if the portion is variable, in exchange for an identified benefit provided by the employer.

“Reed, however, did not provide any benefit at all; it merely applied the dispensation in order to enable it to attribute part of the pay, entirely notionally, to the reimbursement of expenses, so that the tax and NICs burden could be reduced.

“Far from providing a benefit to the employed temp, it appropriated a significant part of the saving to itself; and the supposed sacrifice, however it was presented, was no more than an arithmetical adjustment whose purpose was to ensure that Reed secured the intended share of the benefit.

“It was not, in our view, a sacrifice in the true sense of that word.”

The case demonstrates how difficult it has become to defend arrangements that reduce employees’ salary or cash allowances, which are then replaced by a benefit or another form of payment.  

Mike Moore, tax director at Deloitte, explained: “The Reed decision highlighted that this is particularly the case where none or very little of the savings are shared with employees. 

“Clear contractual documents and employee communications are key in ensuring that robust plans are compliant for tax purposes. 

“Businesses should review how they currently operate their salary sacrifice and car allowance schemes.”

The case centred around the documentation Reed had in place and suggested it did not support the fact that a salary sacrifice took place. 

It was also based on whether an employee of Reed would have understood the arrangement sufficiently to agree that they had varied their contractual position by reason of a salary sacrifice. 

Alastair Kendrick, tax director at MHA MacIntyre Hudson, said: “This is a reminder to all employers of the risks involved in setting up a salary sacrifice arrangement – whatever it relates to – and the need to get professional tax support and HMRC clearance. 

“We see a number of providers suggesting they have a ‘HMRC-approved scheme’. There is no such thing, with HMRC only giving clearance based on the facts of the particular scheme and how it is applied by that employer.”

In a statement, Reed said: “We are extremely disappointed by the decision of the Court of Appeal.

“We stress that this is a historical tax dispute 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.”

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