An FCSA accredited umbrella company, Exchequer Solutions, has lost a First-Tier Tribunal against HMRC relating to an £11 million tax bill due to errors processing historical contractor expenses. In this article, we summarise the case between HMRC and Exchequer Solutions and share the FCSA’s official response to the First-Tier Tribunal ruling in favour of HMRC.
What has HMRC accused Exchequer Solutions of having done incorrectly?
FCSA member Exchequer Solutions, an umbrella company based in Chester, has been accused by HMRC of owing £11 million in unpaid tax and National Insurance Contributions as a result of the way they have handled historical contactor expenses. The alleged £11 million bill has accumulated between the 2013/14 and 2016/17 tax years.
The official decision document states:
“The key issue in this appeal is whether [Exchequer Solutions] employs the relevant individuals on a continuous basis under an overarching or umbrella contract of employment which covers all of the various assignments undertaken by a particular employee through [Exchequer Solutions] and includes any gaps between those assignments (including periods where the individual may be working for another employer) or whether there is a series of separate contracts of employment in respect of each individual assignment.”
The document continues to explain the case in more detail:
“The importance of the distinction lies in the entitlement of the employees to be reimbursed for travel and subsistence expenses without that reimbursement being subject to tax or national insurance contributions (“NIC”). If there is an overarching contract of employment, each place of work is a temporary workplace and the expenses can be paid tax free. However, if there is a separate employment contract for each assignment, the workplace is a permanent (albeit possibly short-lived) workplace and any payment in respect of expenses remains within the scope of tax and possibly NIC.”
In an article on Contractor UK, a popular news website for temporary workers in the UK, legislation expert Carolyn Walsh explains the tribunal in more detail. Carolyn told Contractor UK:
“HMRC found that the part of [Exchequer Solutions] workers’ income was processed as travel costs paid free of tax and NI, and that relies on PAYE legislation; so the involvement of an overarching contract of employment was only part of the challenge.
HMRC warned the sector in 2015 that the way umbrella companies processed expenses would change; which it did with the removal of dispensations in 2016 and the allowance of tax relief on reimbursed travel expenses only where the agency/umbrella worker is not working under supervision, direction or control.”
For more information, please read our blog: What is supervision, direction and control?
Conclusions from the First-Tier Tribunal
The Tribunal Judges’ conclusions (below) are taken directly from the official First-Tier Tribunal notes hosted on the British and Irish Legal Information Institute website.
- There is no overarching contract of employment between ESL and those individuals who carry out assignments through ESL. Instead, a separate employment comes into existence in respect of each assignment. As a result of this, any reimbursement of expenses incurred in attending those places of work is not available as a deduction from earnings for income tax purposes in accordance with s 338 ITEPA and is not to be disregarded for NIC purposes in accordance with paragraph 3 of part VIII of schedule 3 to the Social Security (Contributions) Regulations 2001.
- The Regulation 80 Determinations issued by HMRC on 26 February 2018 are valid as they contained an adequate description of the class of employees in respect of whom the tax is payable or, if the description is not adequate, any defect is cured by s 114(1) TMA.
- A payment representing the reimbursement of expenses incurred by an employee in attending a permanent place of work is a profit derived from an employment and is therefore earnings for the purposes of s 3(1)(a) SS(CB)A.
- ESL does not have a right of supervision, direction or control over the manner in which any relevant individual who has received a reimbursement of expenses in the 2016/17 tax year provides their services.
- ESL was not entitled to reimburse subsistence expenses on the basis of benchmark scale rates as it had not applied for or received a dispensation in accordance with s 65 ITEPA.
- As will be apparent, the key points of principle have been decided in favour of HMRC. However, it is now necessary in accordance with direction 3 of the directions issued by the Tribunal on 23 March 2022 for the parties to endeavour to agree the amount of any liability to income tax and NIC based on the amount of the travel and subsistence expenses paid by ESL to its employees.
- The parties are directed to inform the Tribunal if agreement is reached so that the necessary action can be taken to finalise these proceedings.
- Should there be no agreement by 30 November 2022, the parties are directed to inform the Tribunal and, if possible, to provide agreed directions with a view to a hearing in relation to the amount of any liabilities. If no agreement is possible, each party should provide their own proposed directions, highlighting any areas of difference. Either party may, of course, apply for an extension of time for compliance with this direction (with reasons) if it considers that an agreement on the amount of any liabilities can be achieved without the need for a further hearing.
For more information, please visit the British and Irish Legal Information Institute website.
Chris Bryce, CEO at the FCSA, responds to the First-Tier Tribunal ruling in the favour of HMRC
Chris Bryce, the CEO at FCSA, has shared his views on the ruling in the favour of HMRC. He said:
“As set forth in the description of the Tribunal’s decision, this case depended on the manner in which the employment contracts between Exchequer Solutions and its contractors were performed, in terms of whether or not they were continuously employed by the company.
The Freelancer and Contractor Services Association (FCSA) is aware of the First Tier Tribunal ruling on Exchequer Solutions’ dispute with HMRC on the reimbursement of expenses to PAYE workers, either fully-receipted or under HMRC scale rate protocols, during the tax years 2013/2014 until 2016/2017.
We have been in constant dialogue with Exchequer concerning this matter. HMRC’s case rests almost entirely on the question of the employment contracts issued by Exchequer to workers at the time and whether those contracts were overarching contracts of employment or if each assignment should be considered as a separate employment.
There is no statutory definition of an overarching contract, so this is a highly technical argument concerning employment law and tax regulation. It is important to note that there are no allegations, by HMRC or any other party, of any type of fraud or negligence in this case.”
Chris continued:
“It is also key to point out that, at this stage, Exchequer has no liability to HMRC and that this is a dispute between Exchequer and HMRC which is still ongoing. The final determination following appeal is likely to take more than a year and, even if Exchequer were to lose their appeal, they have been advised that it is extremely unlikely that HMRC would seek to pass any liability to the workers concerned.
FCSA believes that the rush to judgement that we have seen from some quarters is premature and demonstrates a basic lack of understanding of due process and the intricacies of this particular case.”
The FCSA released a statement about accredited member Exchequer Solutions in a LinkedIn post on Thursday 23rd June. The statement said:
“Exchequer first became FCSA members in May 2020, more than three years after the period in question and were found to be compliant with FCSA’s Codes at that time. They have subsequently been assessed by independent experts to be compliant with FCSA’s Codes in no less than two annual reviews, with a third underway at present the outcome of which will be announced, as usual, in due course.
FCSA’s assessment process is unique in the industry in that it is carried out by a panel of independent expert professional services firms consisting of EY Legal, EY Tax, Saffery Champness, BDO, Brabners, and JMW Solicitors who assess compliance with FCSA’s publicly published Codes in a rigorous and thorough manner.”
A further blow to the reputation of the umbrella company sector
The First-Tier Tribunals’ ruling in favour of HMRC is another blow for the umbrella company sector, which has recently been heavily scrutinised by stakeholders concerned about its integrity.
Not so long ago, an FCSA-accredited umbrella company was accused of wrongfully retaining the holiday pay of its employees. Cyber-attacks have also struck the industry, leaving hundreds of contractors and freelancers without income for several weeks. When you consider these reported issues, along with mini umbrella company fraud and the ever-lasting presence of tax avoidance schemes – the sector has had a challenging time.
If you are a contractor or freelancer interested in using an umbrella company, we recommend you consider using one accredited by the FCSA or Professional Passport. You must conduct thorough due diligence. Never be tempted to use a tax avoidance scheme because you could face life-changing financial penalties in the future.
For more information, read our blog: HMRC name and shame three tax avoidance schemes.
Top 10 umbrella companies
Are you looking for an umbrella company that you can trust? We have collated a list of our top 10 umbrella companies, and they’re all accredited by either the FCSA or Professional Passport. We recommend you check them out because not only do they take compliance extremely seriously, but some have special offers at the moment!
