Overarching employment contracts and deductible expenses

The Court of Appeal has dismissed the taxpayer's appeal in Mainpay Ltd v HMRC [2025] EWCA 1290, holding that the umbrella company employment arrangements in this case did not amount to a single, continuous employment contract and, therefore, subsistence and travel expenses paid by the taxpayer to employees when on individual assignments were not deductible expenses which could be paid free of PAYE and NICs.

In addition, the Court has held that assessment made on the basis that the loss of tax had been brought about carelessly in this case were validly made. The FTT had been entitled to conclude that the taxpayer had been careless in failing to take specific advice and that failure had caused the loss of tax.

Background

Mainpay is an umbrella company contracting with temporary workers in connection with agency work arrangements. Mainpay has contracts with employment agencies, which, in turn, have contracts with organisations such as schools and hospitals. Mainpay has an over-arching contract with workers under which assignments were administered.

Mainpay argued that this contract amounted to an over-arching contract of employment and, therefore, each of the places at which a worker works on an assignment is a temporary workplace (or, if it is not a temporary, is not a permanent, workplace). On that basis, Mainpay was entitled to reimburse the workers' travel and subsistence expenses and to deduct those amounts from their income for the purposes of income

tax and NICs. Mainpay was also, it argued, entitled to reimburse subsistence expenses using a round sum or benchmark scales rather than requiring the workers to provide evidence of their expenses, despite not having applied for (or having been granted) a dispensation in accordance with section 65 of ITEPA which would have confirmed that those payments would incur no liability to tax.

HMRC argued that each assignment was a separate employment, meaning that each place of work was a permanent workplace. On that basis, travel and subsistence expenses were not deductible. If that was wrong, HMRC argued that Mainpay was not entitled to use benchmark rates, as without a dispensation an expense is not deductible without evidence it had been incurred.

The FTT found against Mainpay. There were two separate contracts covering the period under dispute, the 2010 contract and the 2013 contract. The 2010 contract was not intended to be a contract of employment, but the 2013 contract was so intended. In either event, however, workers would agree assignments directly with agencies, would then give details of the assignment to Mainpay and Mainpay would then administer the assignment through its online portal via which the assignment was formally accepted. Under both contractual arrangements, a claim for fixed amount subsistence expenses was automatically included by default and without workers needing to provide any evidence of the expenses.

The FTT agreed with HMRC that, whilst there was an over-arching contract throughout with workers, there was not an over-arching contract of employment. The contract that continued to subsist in-between assignments was not a contract of employment as the necessary mutuality of obligation did not exist between assignments. The FTT also rejected the argument that, even if there was not an over-arching contract of employment, there was still a single employment covering all the assignments. HMRC were right to analyse the contract as a framework agreement under which consecutive employment contracts arose each time an assignment was entered into. Since there was no single contract of employment, the travel and subsistence expenses were not deductible as they did not relate to work carried out at a temporary workplace as required by ITEPA 2003 ss.338 and 339.

The Upper Tribunal held that the FTT had made no error of law in its approach to the case and there was no reason to criticise that decision. Mainpay appealed to the Court of Appeal arguing that: the FTT had applied the wrong test to decide whether two discontinuous periods of work are part of the same employment; and that an employer may not use a reasonable estimate in calculating the appropriate deduction for tax purposes in the absence of a dispensation from HMRC.

Decision of Court of Appeal

The Court of Appeal has rejected the appeal. The Court agreed with the FTT that, while the relationship between the taxpayer and its employees was governed by the same contract throughout, that did not mean it could be classified as a continuing contract of employment. Analysed correctly, there were periods of employment under the contract during assignments and, in the gaps between assignments, there was no employment contract at all. Therefore, the contract gave rise to successive employments. It followed that each assignment was separate and the place of work for each of those individual assignments was not a temporary place of work and the subsistence and travel expenses in attending those places were not deductible.

As a result, the question whether an employer can use reasonable estimates for such expenses became unnecessary to determine and the Court declined to comment.

Carelessness

The taxpayer also argued that certain of the HMRC assessments were out of time as made after the usual four year period. HMRC sought to uphold those assessments on the basis that the loss of tax was brought about carelessly such that an extended six year period of assessment applied under TMA 1970 s.36.

The FTT and UT had agreed with HMRC that the loss of tax was due to carelessness on the part of Mainpay. The FTT considered that whilst Mainpay took advice on the contracts, they had failed to take appropriate advice on the deductibility of subsistence expenses under those contracts. In any event, the advice received in relation to the 2010 contract had been on the basis that the expenses would be business expenses. Mainpay had been careless and this had caused the loss of tax. Mainpay appealed arguing that HMRC had failed to show the necessary causal connection between any carelessness and the loss of tax.

The Court of Appeal agreed that there must be a necessary causal connection between the taxpayer carelessness and the loss of tax. However, the FTT had applied this test correctly in determining that the loss of tax (by treating the expenses as tax deductible) was as a result of the carelessness. On the FTT's findings, "it is obvious that had Mainpay taken reasonable care, the contracts would have been overarching contracts of employment. If they had been overarching contracts, the reimbursement of those expenses would not have been liable to tax... Mainpay did not take reasonable care to ensure that the contracts were overarching contracts. Mainpay nevertheless reimbursed the expenses free of tax, as if the contracts were overarching contracts, when, in law, those payments were liable to tax. Had Mainpay taken reasonable care, therefore, on the F-tT's findings, that loss of tax would have been avoided".

The Court of Appeal did not consider it was necessary for the FTT to consider what would have happened if Mainpay had taken reasonable care. In fact, the FTT had considered this point and considered that at the very least the issue would have been flagged as a potential problem. The Court of Appeal, however, suggested that the FTT was not required to "speculate about what might have happened if further advice had been sought, all the more so because a taxpayer cannot be required to waive legal advice privilege, so that the F-tT would not necessarily have and in this case did not have all the relevant evidence".

Comment

It seems clear that Mainpay could have organised its contractual arrangements such that they did amount to an over-arching employment contract, rather than a framework agreement for separate periods of employment. However, it had failed to take proper advice on this, and the deduction of subsistence expenses and this resulted in the loss of tax.