Umbrella companies beware - the travel expenses and salary sacrifice trap

HM Revenue & Customs ("HMRC") frequently attack umbrella companies that it considers are abusing expenses and subsistence claims to increase the take home pay of workers.

Earlier this year Reed Employment Plc & Ors (“Reed”) lost its appeal against a tax assessment for £158m in respect of its travel expenses scheme. The tax and national insurance contributions assessed on Reed were in relation to expenses payments made to its temporary “employees” under a salary sacrifice and travel allowance scheme operated by it.

Workers entered into a salary sacrifice agreement under which they gave up pay and were paid travel and subsistence allowances instead. Their net pay was unchanged. Travel allowances were paid on the basis that travel was being made to temporary workplaces attended under an overarching employment contract.

Salary Sacrifice 

A salary sacrifice involves an employee giving up part of his entitlement to salary, which is subject to income tax and national insurance contributions, in exchange for a non-cash benefit, which benefits from a full or partial exemption from tax and/or national insurance contributions.  The tribunal found that Reed failed to pay any reciprocal benefit to the worker in return for the sacrifice or indeed explain that the workers needed to give anything up.  In addition, it was found that there was insufficient explanation of the scheme to enable the workers to make an informed decision and, generally unknown to the workers, there was significant financial advantage from the arrangement to Reed.  As such, the sacrifice was deemed to be invalid. 

Overarching Contract 

For travel costs to be tax deductible employees must be classed as travelling to and working at a temporary workplace.  To be classified as a temporary workplace, employees would have to be employed under a continuing ‘overarching’ contract of employment with Reed.  The nature of an overarching contract of employment is that it links together a series of assignments and they provide for employment that will ‘overarch’ any number of assignments. Accordingly, the end of an assignment is not the end of the employment. The intention is, the terms of the overarching contract would apply throughout the period of employment, whether or not the worker was on assignment.  In the case of Reed, the tribunal found that the contract of employment did not provide for any mutuality of obligation between the two parties during periods between assignments and as such, did not demonstrate a continuing contract of employment.

The result was that each assignment represented a single employment and the workplace was therefore not temporary because it was the only workplace for the duration of that employment. This meant that travel to and from each assignment was ordinary commuting and disallowable for tax.

The Reed case highlights the importance of implementing any tax planning arrangements carefully and highlights the need for all umbrella companies, staffing companies and hirers who use umbrella arrangements, to immediately review the terms of their contracts with umbrella companies and/or umbrella workers checking, in particular, between assignment contractual obligations and practical arrangements relating to the periods between assignments.

If you require our assistance in this area, please contact Sajeda Motala on 0161 603 5191 or at

This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.