27 Jan 2012

Reed’s Expensive Expenses!

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Someone in Reed Recruitment will no doubt be looking for a new job after the company were hit with a £158m liability for paying out expenses to their workers when they should not have been.

The contract Reed implemented was not considered to be ‘overarching’ a concept which is absolutely fundamental if they were not going to apply tax and national insurance to the expenses claimed by the workers.

One of the most interesting aspects of this case is that one of the contracts Reed utilised contained a 336 guaranteed minimum hour’s clause. This is something previously circulated by HMRC as a way of showing that the contract was sufficiently overarching but was never actually written within the expenses legislation.

As a result of HMRC rumblings many umbrella companies started including the same 336 hour clause in their contracts, assuming that this would afford them protection, despite the fact that 336 hours were not actually written in the legislation, the legislation being what prescribes the circumstances under which expenses can be paid out tax free.

All companies should take note that it is always best practice to place reliance on what the law actually says rather than thinking HMRC guidance is the law of the land.

Hopefully the principles of this case will filter through and eventually see the demise of a number of umbrella companies in this industry that simply don’t understand the fundamental aspects of their business and why and how they can do what they do (as long as they don’t go under owing all their contractors money).

Since this judgement was released Reed have appealed the decision which is unsurprising given the liabilities in question. The judge for the initial hearing was however Avery Jones, a well-respected (now retired) tax commissioner who did not have his cases over-turned very often. Reed may therefore face an uphill struggle to navigate round this one!