Mainpay Ltd v The Commissioners for HMRC

A contract's legal classification depends on the legal effect of all its terms, not the parties' label or asserted intention. A single agreement may govern periods in which a worker is employed and gaps in which no employment contract exists. Those intermittent periods are successive employments for the relevant tax provisions.

For the extended assessment period under the Taxes Management Act 1970, “brought about” requires causation. Failure to take reasonable care is not enough by itself. HMRC must show what was careless and how it caused the tax loss, but need not prove the precise counterfactual outcome that would have followed from adequate advice. Once HMRC establishes a prima facie case, the taxpayer bears the evidential burden of rebutting carelessness or causation.

Mainpay, an employment business or umbrella company, appealed against tax determinations and related notices concerning subsistence payments made to temporary workers. The First-tier Tribunal dismissed the appeal, and the Upper Tribunal upheld that decision in [2024] UKUT 00233 (TCC).

The Court of Appeal considered whether successive assignments separated by gaps were one discontinuous employment or separate employments under the Income Tax (Earnings and Pensions) Act 2003. It also considered whether Mainpay's carelessness had brought about a loss of tax so as to extend the assessment period under the Taxes Management Act 1970. A further ground concerning the calculation of deductible expenditure did not arise.

1. Disposition. Lady Justice Elisabeth Laing gave the leading judgment. Lord Justice Arnold and Lady Justice King agreed. The appeal was dismissed.
2. Ground 1. The legal character of a contract is determined by analysing the legal effect of all its terms. The parties cannot make their label or asserted intention decisive. Under section 4 of the Income Tax (Earnings and Pensions) Act 2003, employment is linked to a contract of service. The same agreement may govern the parties throughout, but it cannot be treated as a continuing contract of employment during periods when no contract of employment exists.
3. During the gaps between assignments there was no contract of employment and therefore no employment. The periods of employment on the assignments were successive employments, not one employment, despite being governed by the same framework agreement. The First-tier Tribunal and Upper Tribunal were correct on that issue.
4. Ground 3. The expression “brought about” in sections 29 and 36 of the Taxes Management Act 1970 means caused. Section 118(5) defines carelessness by reference to failing to take reasonable care to avoid bringing about the loss or situation, but it preserves rather than removes the causal requirement. HMRC therefore had to establish both careless conduct and a causal connection with the loss of tax.
5. Where the alleged carelessness consists of deficient advice or a failure to obtain appropriate advice, HMRC must show what the taxpayer should have done differently and how that failure contributed to the loss. It need not prove a particular counterfactual outcome or speculate about what the taxpayer would have done after receiving adequate advice. On the facts, Mainpay should have obtained appropriately qualified advice on whether its contract achieved the intended tax treatment. The First-tier Tribunal was entitled to find that this failure caused the loss of tax.
6. HMRC bore the legal burden of proving that section 36(1) applied. Once it had established a prima facie case of carelessness and causation, Mainpay bore the evidential burden of showing reasonable care or absence of causal connection. The tribunals were also entitled to find that HMRC's pleading sufficiently identified the case Mainpay had to meet. Ground 2 did not arise and no view was expressed on it.

1. Court of Appeal (Civil Division). Appeal from the Upper Tribunal dismissed. Grounds 1 and 3 failed; ground 2 did not arise.
2. Upper Tribunal (Tax and Chancery Chamber). In [2024] UKUT 00233 (TCC), the Upper Tribunal upheld the First-tier Tribunal's dismissal of Mainpay's appeal.
3. First-tier Tribunal (Tax Chamber). The tribunal dismissed Mainpay's appeal against HMRC's determinations and notices.