Employment Agencies: travel and subsistence schemes

12 August 2015

The Court of Appeal has recently confirmed in Reed Employment PLC v HM Revenue & Customs [2015] EWCA Civ 805 that the widely used practice by employment agencies of “salary sacrifice” travel and subsistence allowances is not lawful.


This case involved the employment of “temps”. That is, individuals who were employed by Reed Employment PLC to participate in temporary assignments at end user clients. The temps were paid an hourly rate, based on the amount of hours they had worked. Reed also attempted to use a travel allowance, which deducted an amount off the temp’s total gross pay therefore reducing the amount of taxable pay. This amount would then be reimbursed to the temp as a non-taxable travel allowance in respect of mileage or travel to (what Reed argued was) the temp’s “temporary” workplace. The effect of this would be to produce a saving of both income tax and employer’s National Insurance Contributions (“NIC”), part of which would be shared with the temporary employees.

Reed’s objective was to leave the temp with at least the same net after tax pay as they would have had before the arrangements were implemented, and Reed would have to account to HMRC for less tax and employer’s NIC.

Income Tax (Earnings and Pensions) Act 2003 (“ITEPA”)

ITEPA imposes an income tax charge on (a) general earnings and (b) specific employment income. “Earnings” are defined at section 62(3)(b) to include anything which is “capable of being converted into money or something of direct monetary value to the employee”.

However, certain deductions may be made from “earnings” in order to arrive at net taxable earnings (i.e. a traditional salary sacrifice scheme). This includes travel expenses where they fall within sections 337 or 338 of ITEPA – that is, where expenses were necessary for the employee to carry out their role. However, the recent case of Reed made clear that it is not possible to apply sections 337 or 338 where the payments made in respect of travel expenses were “earnings”.

The issues

The main issue the Court of Appeal needed to consider in this case was, therefore, whether the payments in relation to travel expenses were part of the earnings of the temp’s contract of employment.

The First Tier Tribunal (“FTT”) found that Reed’s travel scheme was incorporated into the temps’ contracts of employment, even though many of the temps did not understand it. The Court of Appeal agreed with this, stating that the temps were “entitled to be paid the product of the agreed hourly rate and the number of hours worked”, and it was envisaged that travel expenses form part of that product. It therefore held that “the whole of the product of the hours worked and the hourly rate would count as “earnings” for tax purposes”.


The Court of Appeal’s decision has made clear that it is no longer possible for an employment business to seek to use deductions from gross pay, which are then reimbursed as travel expenses, with a view to achieving tax savings. This will have a large impact on the bottom line of many employment businesses who have been exercising such schemes for a number of years.

Employment business should therefore immediately cease such arrangements, if they have them in place.

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