The Court of Appeal (CoA) gave a ruling, one which established that temporary worker arrangements fail to constitute a single, continuous employment relationship where the worker retains an unfettered right to refuse assignments, thereby reinforcing the prerequisite of mutuality of obligation for accruing tax breaks.
Facts:
Mainpay, an "umbrella company", engaged temporary workers, mainly within the sectors of education, health, and social care, and argued that its relationship with these workers constituted a single, continuing employment or, at least, a single discontinuous employment, meaning the various workplaces they attended were temporary. Based on this view, Mainpay reimbursed the workers for travel and subsistence expenses and deducted those amounts from their income for tax purposes. Mainpay also used round sums, or benchmark scales, for subsistence expenses without having applied for any formal dispensation from HMRC.
HMRC argued that each assignment was a separate instance of employment, meaning that each workplace was a permanent workplace for the purpose of that assignment. If the workplaces were permanent, then the expenses would not be deductible at all. Furthermore, HMRC contended that, even if the expenses were deductible in principle, Mainpay was not entitled to use benchmark rates without a dispensation.
The dispute involved two main contracts, specifically the 2010 contract (which was not intended to be a contract of employment) and the 2013 contract (intended to be a contract of employment). HMRC issued assessments for the tax years 2010–2014. The assessments for the first two years (ending 5 April 2010 and 5 April 2011) were issued more than four years after the relevant tax year, requiring HMRC to prove that the loss of tax was "brought about carelessly" by Mainpay to justify the six-year extended time limit.
The First-tier Tribunal (FTT) found that neither the 2010 nor the 2013 contract were overarching contracts of employment, as the workers retained an unfettered right to refuse assignments. Thus, the contracts lacked the necessary mutuality of obligation in the gaps between assignments. Consequently, the FTT held that each assignment was an instance of separate employment and that the workplaces were, in effect, permanent, making the expenses non-deductible. The FTT also found that Mainpay was "careless" in claiming the deductions, particularly in relation to the 2010 contract, because it relied on vague assurances from employment lawyers. The Upper Tribunal (UT) upheld the FTT’s decision, and Mainpay appealed.
Decision:
The CoA dismissed the appeal, upholding the decisions of the UT and the FTT. The Court rejected Mainpay’s argument that the parties’ intention should be decisive in construing the contract, as what essentially matters is the reality of the arrangement. In this instance, the intention was one of intermittent employment, followed by periods in which there was no employment. While the contract was one of employment during an assignment, it did not serve as a contract of employment in the gaps between assignments because the FTT had found a lack of mutuality of obligation. Thus, each assignment was under a separate contract of employment for the purposes of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA), and therefore, a permanent workplace.
The Court upheld the finding that the loss of tax was "brought about carelessly" by Mainpay, validating the extended assessment time limit under the Taxes Management Act 1970 (TMA). The FTT was entitled to find that Mainpay was careless for failing to take reasonable care to avoid the loss of tax. This failure stemmed from relying on a vague assurance from non-tax specialist employment lawyers about the deductibility of expenses.
Implications:
This decision confirms that for a permanent, overarching contract of employment to exist – one that bridges the gaps between assignments and affords the workers continuous employment rights – there must be mutuality of obligation in those gaps. While Mainpay had a contractual obligation to offer work, the lack of any reciprocal obligation on the part of the workers meant that the relationship ceased to be one of employment once an assignment had ended.
The case provides a clear distinction between a general agreement that governs future work and an actual contract of employment – a contract that sets the terms under which future, separate contracts of employment will be formed. This type of agreement alone does not create a state of continuous employment. Mainpay's contract was categorised as a framework agreement under which successive contracts of employment arose for each assignment.
This ruling reinforces the principle that the tax treatment of expenses is contingent upon the underlying status in terms of employment law (e.g., whether a single overarching contract exists). If employment law dictates that there are separate engagements, then tax law will likely follow suit regarding the permanent nature of the workplace.
