Reimbursed Expenses Not Tax Deductible, Court of Appeal Rules

The Court of Appeal has upheld HMRC’s determinations against an umbrella company, ruling that reimbursed travel and subsistence expenses paid to workers were not tax deductible for Income Tax (IT) or National Insurance Contributions (NICs). The decision confirms that the company did not have overarching contracts of employment with its workers, meaning each assignment amounted to a separate employment at a permanent workplace.

The umbrella company engaged workers primarily in education, health and social care. It maintained that it had continuous employment arrangements with those workers, such that each new assignment was a “temporary workplace”. On that basis, it argued that reimbursed expenses should be tax deductible and that it was entitled to use HMRC’s benchmark rates without requiring receipts, despite not having obtained a statutory dispensation.

HMRC disputed this analysis, concluding that each assignment constituted a self-contained employment involving attendance at a permanent workplace. As such, none of the travel or subsistence expenses were allowable for tax purposes. HMRC issued IT and NIC determinations accordingly.

Tribunals Supported HMRC’s Position

The First-tier Tribunal (FTT) agreed with HMRC, finding that:

• each assignment was a permanent workplace;
• the expenses were non-deductible;
• without a dispensation, the company could not rely on benchmark rates; and
• the loss of tax in the first two years was due to the company's carelessness, allowing HMRC to use the extended six-year assessment window under s.36 Taxes Management Act 1970.

The umbrella company failed in its subsequent appeal to the Upper Tribunal (UT), prompting a further appeal to the Court of Appeal.

Court of Appeal: No Overarching Employment Contracts

The Court of Appeal rejected the company’s arguments, holding that the Tribunals had applied the correct legal test. It confirmed that:

• workers were only employed intermittently, during each assignment;
• the gaps between assignments meant there was no continuous employment;
• the employments were successive, not part of one overarching contract.

It also upheld the finding of carelessness, noting that the company had treated part of workers’ pay as tax-free without ensuring that the contractual arrangements supported such treatment. Had reasonable care been taken, the resulting loss of tax would have been avoided.

The company’s appeal was dismissed.

This judgment reinforces HMRC’s long-standing approach to umbrella companies and the importance of carefully assessing employment status and workplace permanency when determining the tax treatment of reimbursed expenses.

Q&A: Understanding the Court of Appeal Decision

What is an overarching contract of employment?

It is a single, ongoing employment relationship covering multiple assignments. If it exists, each assignment may be treated as a temporary workplace, allowing certain expenses to be deductible. The Court found that no such contracts existed in this case.

Why does it matter if a workplace is “permanent” or “temporary”?

Travel and subsistence expenses incurred when attending a permanent workplace are not tax deductible. Expenses for a temporary workplace can be deductible, subject to HMRC rules.

Can an umbrella company reimburse expenses using benchmark rates without a dispensation?

Not historically. Before April 2016, a dispensation under s.65 ITEPA 2003 was required to use benchmark rates without receipts. The company in this case did not have one.

Why was the extended six-year assessment window allowed?

HMRC can issue assessments up to six years later if a loss of tax is caused by carelessness. The Court agreed that the company failed to take reasonable care regarding the nature of its employment contracts and tax treatment.

What does this mean for umbrella companies?

Umbrella companies must carefully structure their contracts and cannot assume that multiple assignments form a single employment. Incorrect treatment of expenses can lead to significant retrospective tax liabilities.