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Court Decides Umbrella Contract Is Not Employment

An Upper Tribunal has concluded that an umbrella’s overarching contract was not employment, meaning that they are potentially liable for a multi-million tax bill for incorrect treatment of travel and subsistence expenses.


Employees can claim tax deductible travel and subsistence expenses incurred through being required to attend temporary workplaces for their employer.  Umbrella companies that employ contractors in an overarching contract of employment can give this tax deduction at source, i.e. at the time the worker is paid their wages.

HMRC brought a case against umbrella company Exchequer Solutions Limited saying that their contract was not genuine employment.  The outcome of this case could mean a significant tax liability for Exchequer for incorrect tax treatment of travel and subsistence expenses.

Exchequer appealed the conclusions of the original case, the Upper Tribunal heard the appeal and the judgment has been published.

Interpretation of the contract

Exchequer Solutions Limited appealed the findings of the initial tribunal on several grounds regarding the interpretation of their overarching contract of employment, an extract of relevant wording is below:

“3.2 The Employer will endeavour to provide you with work and procure work for you at various sites during the course of your employment. Due to the nature of the services provided by the Employer, while your duties of employment may vary, the Employer has a continuing need for skilled employees and as such by virtue of your employment you can reasonably expect to be provided with ongoing work at various sites.”

Exchequer argued that this, alongside several other clauses (covering multiple workplaces, variable duties, notice periods, variable hours, and future pay), referred to ongoing future assignments and therefore that the contract did not cover solely the initial work undertaken.  These provisions would have been unnecessary if the contract of employment intended to terminate with each assignment since the terms of the assignment would have been known.

However, the judgment states that the original tribunal “directed itself to the right test of contractual interpretation and then applied the test correctly. We therefore reject ESL’s Grounds”

Exchequer’s role in providing ongoing work

Whilst Exchequer had the contractual duty “to provide you with work and procure work for you”  the judgment found that individuals had no expectation of Exchequer finding their future assignments.  The commercial reality was that employment assignments were obtained via the relationship between the individual and the employment agency – and there was no opportunity for Exchequer to intervene in such arrangements.

Exchequer being the employer during gap periods was also considered, but does not help because in the gap periods there was no need for anyone to be the employer.  In addition the judgment said “For our part we consider that the fact that the individuals were free to work for others in the gap periods was entirely consistent with ESL not being in a position to offer any work and was antithetical to the existence of the requisite mutuality.”

Other points considered

In addition to mutuality of obligation, Exchequer’s appeal also raised points on the validity of the Regulation 80 determinations (employer tax owed to HMRC) plus that the reimbursements were not “earnings” for NICs purposes.  It was concluded that the Regulation 80 determinations were valid, although they should have specified the class.  The judgment sums up:

“Once it had been decided (correctly as we have found) there was no overarching contract of employment, the travel to each individual assignment was travel to a permanent workplace; in other words ordinary commuting expenses. For all the reasons we have discussed the FTT was entirely correct to reject ESL’s argument that reimbursement of commuting expenses, although subject to tax, escaped the scope of NICs.”

What does this mean for the umbrella sector? 

This case may send shockwaves through the umbrella sector for two reasons.  Firstly, umbrellas providing tax deductible travel and subsistence expenses to their workers was a very normal way of operating historically.  Exchequer are not the only umbrella that did this, many more will be watching this case and may now be worried about potential liabilities catching up with them.

Secondly, this case undermines the overarching contract of employment by concluding that it isn’t actually employment.  However a fundamental benefit of umbrellas is the continuity of employment whilst their workers undertake multiple different assignments.  If this is considered not to be employment in reality, it perhaps undermines the whole purpose of umbrellas.

NB: due to changes in legislation in 2016, only a tiny proportion of umbrella workers will currently be eligible for tax deductible expenses and it is likely that you would know if this applies to you.  If you aren’t sure, check your payslips for anything that isn’t taxable pay and ask your umbrella if you see anything unexpected in your pay.

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