Reed Employment Plc & Ors v HM Revenue and Customs

Whether travel-related payments are taxable earnings depends on the substance of the contractual arrangements, construed by ordinary principles. The tax context does not require enhanced clarity, but the court must examine reality and disregard camouflage. A payment remains earnings where the contract pays by reference to hours worked and an hourly rate, without a genuine reduction in that wage. Describing part of the pay as a travel allowance, or making tax and National Insurance adjustments, does not itself create a separate reimbursement of expenses. Ambiguous handbooks and payslips cannot displace clear contractual terms. The appeal was dismissed without deciding dependent questions about temporary workplaces, qualifying expenses or legitimate expectation.

Reed, an employment agency, employed temporary workers and operated the Reed Travel Allowance and Reed Travel Benefit arrangements. It argued that the arrangements reduced salary and separately reimbursed travel and subsistence expenses, allowing tax and National Insurance savings under the Income Tax (Earnings and Pensions) Act 2003 and HMRC dispensations.

The First-tier Tribunal held that the payments were taxable earnings: [2012] UKFTT 28 (TC), [2012] SFTD 394. The Upper Tribunal dismissed the tax appeal and refused permission for judicial review: [2014] UKUT 160 (TCC), [2014] STC 1882. The central issue in the Court of Appeal was whether the contracts created separate expense payments or a single wage payment.

1. Disposition. The appeal was dismissed. Issue 1 was decisive because the contractual arrangements did not create separate payments reimbursing travel expenses. Issues 2, 3 and 4 therefore did not arise for determination.
2. Statutory framework. The court considered the charge on general earnings and the definition of earnings under the Income Tax (Earnings and Pensions) Act 2003. Payments that were earnings under section 62 did not need to be analysed under the benefits code or the travel-expense deduction provisions.
3. Contractual interpretation. The documents had to be construed by ordinary contractual principles. Taxation did not require enhanced clarity. The court had to examine the reality of the arrangements and avoid being misled by camouflage. The court applied the approach in Heaton v Bell [1970] AC 728 and IRC v Wesleyan and General Assurance Society [1946] 2 All ER 749.
4. RTA. The contractual terms entitled each temporary worker to the product of the agreed hourly rate and hours worked. Clause 7 contemplated that travel expenses might form part of that product, not a separate payment. The handbook described the travel allowance as additional to the normal hourly rate and did not change the headline wage or method of calculation. The supposed adjustment was a deduction from gross pay, not a salary sacrifice.
5. RTB. The later contracts again calculated wages by reference to hours worked and the agreed hourly rate. The reference to a travel allowance did not establish a reduced wage or separate reimbursement. References to salary sacrifice and reductions in gross pay were, at best, ambiguous and could not override the clear contractual terms. The payslips likewise showed payment by reference to the hourly rate and hours worked.
6. The payments were therefore earnings in the hands of the employees. The court noted that interpretation of contractual documents is a question of law, although any error by the Upper Tribunal in formulating the appellate question was immaterial because the tribunals’ conclusion was correct.

• Court of Appeal (Civil Division) dismissed Reed’s appeal.
• Upper Tribunal (Tax and Chancery Chamber) dismissed the appeal from the First-tier Tribunal and refused permission for judicial review: [2014] UKUT 160 (TCC), [2014] STC 1882.
• First-tier Tribunal held that the relevant payments were taxable earnings: [2012] UKFTT 28 (TC), [2012] SFTD 394.