A recent First-tier Tribunal (FTT) case in which the employer company failed to show reasonable care.

A salary sacrifice / exchange happens when an employee gives up the right to part of the cash remuneration due under their contract of employment. Usually, the sacrifice is made in return for the employer’s agreement to provide the employee with some form of non-cash benefit, i.e. a pension contribution. The sacrifice is achieved by varying the employee’s terms and conditions of employment relating to remuneration. Please see Salary sacrifice and pension contributions.

From 6 April 2017, the income tax and national insurance contributions (NICs) advantages where benefits in kind are provided through salary sacrifice arrangements (described in the Finance Act 2017 as “optional remuneration arrangements”) are largely withdrawn, apart from for certain exceptions, such as for pension contributions. Guidance on the changes from 6 April 2017 starts at EIM44000.

The FTT case of The Best Connection Group (TBC) Ltd v HMRC concerned two travel and subsistence payment arrangement schemes for its employees, both via salary sacrifice. The scheme in question was the BestPay Salary Sacrifice scheme (or the “BSS”). It was made available to the company’s temporary employees whose salaries generally exceeded the National Minimum Wage (NMW) by £1. This category of employees comprised HGV drivers and skilled industrial workers.

Over the period 2006 to 2009, the company had become aware that a number of its competitors had implemented salary sacrifice schemes for dealing with the travel and subsistence expenses of their employees and was concerned that it was falling behind the market in not offering the same facility to its employees. Accordingly, it sought advice from Aspire Business Partnership LLP on how to implement its own scheme of that nature. Mr Andrew Sweeney was the Chief Executive and a part owner of the company. He was in charge of finance at the company at all times relevant to the appeals and was responsible for liaising with the company’s advisers in relation to the creation and continuing operation of the BSS.

The dispute between the parties concerned the appropriate income tax and NICs treatment of three different categories of payment which were made by the employer company to employees participating in the BSS over the four tax years ending 5 April 2013 to 5 April 2016 (both inclusive), namely:

(1) payments in respect of mileage undertaken by the participants in going to and from their temporary places of work by car, motorcycle or bicycle;

(2) payments in respect of expenses incurred by the participants in going to and from their temporary places of work by public transport; and

(3) payments in respect of expenses incurred by the participants on food and drink while they were away from home in the course of their employment.

The employer company considered that it did not have to account for income tax or NICs on any of the above payments because, in the case of the payments in respect of mileage, the payments were exempt and because, in the case of the other two categories of payments, the payments fell within the terms of a dispensation that was given to the employer company by HMRC and which covered those payments.

The employer company believed that, in consequence of the above, and the fact that each participant gave up part of their salary in return for the relevant payment:

(1) the relevant participant was better off because:

(a) in contrast to the receipt of salary, no deduction of income tax or employee NICs was required in respect of the relevant payment; and

(b) there was no need for the relevant participant to claim a deduction for the expenses in question in his or her tax return; and

(2) The employer company was better off because, in contrast to paying salary, it did not have to account for employer NICs in respect of the relevant payment.

HMRC did not agree and said that the employer company should have accounted for income tax and NICs on all of the payments.

In addition to the above, the employer company argued that, without prejudice to its submissions on the tax implications of the payments, even if HMRC were found to be correct in their analysis of those tax implications, that it took reasonable care to comply with its obligations to account for income tax in respect of the payments and its failure to do so was due to an error made in good faith. However, HMRC did not agree and argued that the company did not take reasonable care to comply with its obligations to account for income tax in respect of the payments.

HMRC argued that the company had failed to show reasonable care in two respects as follows:

(1) first, it had failed to operate the BSS in the manner that the scheme had been explained to HMRC in applying for the dispensation; and

(2) secondly, in any event, the scheme as operated did not ensure that participants received payments under the scheme only if they had actually incurred mileage or subsistence expenses or public transport expenses. Mr Sweeney, the company’s Chief Executive, had known of this at the time, as he had admitted in giving his evidence. Moreover, he had allowed the scheme to proceed on that flawed basis despite knowing of the importance to HMRC of compliance in relation to payments in respect of expenses.

The FTT considered whether:

• the provision relating to the salary sacrifice was a valid contractual term despite the fact that some matters of detail were not spelled out – and it decided that it was;
• the payments in question were “round sum allowances” by virtue of there being an insufficient causal link between the expenses in question and the making of the payments – and it decided yes, in relation to the payments in respect of subsistence and no, in relation to the payments in respect of travel;
• based on the evidence, it was possible to conclude on the balance of probabilities that all or a specified percentage of the payments in any category related to mileage or expenses that had actually been incurred – and it decided that there was insufficient evidence to reach that conclusion and, instead, the onus was on the employer company to show in the case of any particular payment that the relevant payment met that description;
• the payments in respect of subsistence or public transport were covered by the dispensation given by HMRC – and it decided no, because they fell outside the terms of the dispensation;
• the employer company was entitled to a direction [under Regulation 72 of the PAYE Regulations] that it was not liable to pay the income tax on the basis that it had exercised reasonable care to comply with the PAYE Regulations and its failure to account for income tax was due to an error made in good faith – and it decided no, because the employer company had not exercised reasonable care.

The FTT decided that the Mr Sweeney did take reasonable care to comply with the PAYE Regulations insofar as he:

(1) took comfort from the fact that other employers operated travel schemes involving salary sacrifice; and

(2) relied on Aspire, as experts in the area, to create a scheme that would be lawful and tax effective.

However, in the FTT’s view, Mr Sweeney did not take reasonable care to comply with the PAYE Regulations when he:

(1) did not ask to see a copy of the opinion of leading tax counsel on the tax–effectiveness of the scheme. Although he was relying on Aspire as the relevant experts, it was incumbent on him to read the legal advice on which Aspire said it was relying;

(2) took comfort from the fact that neither BDO nor KPMG had raised issues in relation to the BSS in the course of their audits. This is because those firms had not been asked for their advice in relation to the scheme and therefore their failure to raise issues hardly amounted to a compelling endorsement of the scheme;

(3) apparently did not enquire why the way in which the BSS was set up – with a system of declaration on first registration and then subsequent notification and audit – differed from the system used by Aspire’s other clients;

(4) did not notice that the second stage in the process of dealing with HMRC in relation to the scheme, as outlined in the Aspire letter of engagement, was meant to be obtaining a clearance in relation to the scheme from HMRC and that that clearance had not been sought or obtained; and

(5) did not ensure that the scheme was operated in accordance with what was said to HMRC in the correspondence leading to the issue of the dispensation, particularly given that he was aware of the importance to HMRC of compliance in connection with expenses payments.

The judgement is 82 pages long, and the case has still not been fully resolved. However, there are few key points for employers to consider:

• The payment and deduction arrangement in this case was quite complicated and the employer failed to deduct the correct amount of tax and NICs and pay this over to HMRC. Employers should check that the contractual arrangement is replicated correctly in their payroll software.
• Once the contractual arrangements are in place and payroll software effects this when the employee is paid, the employer is legislatively required to take ‘reasonable care’, i.e. operationally, do all they can to collect the statutory deductions and pay these over to HMRC. In this regard, the term reasonable care is wide and open to interpretation. Yet it is important, as an employer who takes reasonable care is then able to say that they have a reasonable excuse for any non-compliance that may result. 
• In this case, the employer was judged not have to have taken reasonable care in the operation of their scheme and the ruling pointed to the payroll system set-up as being one of the reasons. This highlights why, all processes need to work effectively together across HR and payroll software. Although, of course, software is often only as good as the information that is entered.
• Finally, an effective audit process did not appear to be in place at this company. The first audit did not take place until 18 months after the scheme was introduced and the auditors had not been asked for their advice in relation to the scheme. An effective audit process should help an employer to understand if they are operating in accordance with the law.

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