Pertemps – Upper Tribunal provides guidance on salary sacrifice arrangements

In HMRC v Pertemps Ltd [2019] UKUT 234 (TCC), the Upper Tribunal (UT) has provided helpful guidance on salary sacrifice arrangements and their effectiveness.

This blog is based on an article which was first published in Tax Journal on 11 October 2019. A copy of that article can be accessed here.

Background

Pertemps Ltd (the taxpayer), was a recruitment agency which introduced a "Mobile Advantage Plan" (MAP). This was an optional scheme that provided eligible employees with travel and subsistence expenses by way of salary sacrifice. The employees were flexible employees engaged by the taxpayer on indefinite contracts of employment. Employees were offered the opportunity to participate in the MAP. Any employees who took part agreed to a wage reduction, in return for the taxpayer making a payment for expenses which was equal to the wage deduction. 

To benefit from the MAP, expenses had to be "incurred wholly, exclusively and necessarily" in the performance of the employee's duties of employment. Travel expenses were included so long as they were not "ordinary commuting" expenses to a "permanent" workplace. A workplace became permanent if the employee attended for a period of work lasting more than 24 months. Only employees who operated outside of a permanent workplace were eligible for the MAP.

Employees who participated in the MAP, benefited from the cash flow advantage of an immediate deduction as opposed to receiving taxed employment income and then having to reclaim tax in their end of year return in relation to their expenses (which was the position for those who did not participate in the salary sacrifice scheme).  The taxpayer also benefitted as it did not have to pay primary Class 1 NICs in relation to those employees using MAP.

HMRC formed the view that the MAP involved a taxable supply of services by the taxpayer to its participating employees. It considered that the services were supplied in return for the MAP adjustment and that the taxpayer was liable to account for VAT on that amount. 

The taxpayer appealed to the First-tier Tribunal (FTT).

The FTT allowed the taxpayer's appeal. It held that whilst the operation of the MAP was a supply of services for VAT purposes, it did not constitute an economic activity and therefore was not within the scope of VAT. 

HMRC appealed to the UT. 

UT decision

HMRC's appeal was dismissed. 

The UT considered the following two questions.

(i) Supply of services for consideration

In order for there to be a supply of goods or services for consideration there must be a legal relationship between the supplier and the recipient, pursuant to which there is reciprocal performance whereby the goods or services are supplied in return for consideration provided by the recipient (Wakefield College v HMRC [2018] EWCA Civ 952).  In the view of the UT, there was clearly a legal relationship between the taxpayer and the flexible employee. The real issue was whether there was a supply to the employee and, if so, whether that supply was made for consideration. 

In order to answer this question, it was necessary to  characterise the supply; there must be a transaction. In earlier cases (Commission v Finland (Case C-246/08), Longridge on the Thames v HMRC [2016] EWHC Civ 930, Astra Zeneca UK LTd v HMRC (Case C-40/09)) there was no question that there were services being supplied as, in each case, an identifiable service was provided (legal services in Finland, the use of an outdoor activity centre in Longridge and vouchers in Astra Zeneca). 

The facts in the instant case were different. What was provided by the taxpayer was the payment of expenses ie just money in one (tax efficient) way rather than another. Faced with these facts, the UT struggled to characterise the service, commenting that, "a cash flow advantage in itself is not a service, but merely the consequence of the application of the section 65 ITEPA dispensation". 

It was clear the taxpayer was not providing its employees with anything or changing anything on their behalf. The MAP was not a service in itself, nor was the taxpayer supplying anything which might be regarded as an administrative service. HMRC sought to argue that the position was analogous to accountancy or book-keeping services, but this analysis was rejected by the UT. In the UT's view, all the taxpayer did was comply with the requirements imposed by HMRC on employers operating PAYE and remunerated employees in accordance with their employment contracts. 

Whilst the UT accepted that the MAP adjustment was capable of representing consideration, it ultimately disagreed with the FTT on the existence of a supply. A supply of services requires something to be provided and it was clear there was no supply in this case. The UT commented that where an employer "offers two methods of being remunerated, each of which had slightly different tax consequences … we do not regard that arrangement as showing there is any service supplied by the employer". It follows that not all salary sacrifice schemes will result in a supply taking place for VAT purposes. Whether there is a supply of services or not will turn on distinguishing between the situation where a true supply exists and simple reciprocal rights and obligations under a contract.

(2) Economic activity

In light of its conclusion that there was no supply of services, it was not necessary for the UT to consider whether operation of the MAP was an economic activity. However, for completeness, the UT did consider this issue.

The UT agreed with the FTT that determining whether a person is carrying on an economic activity requires a broad enquiry which has to take into account all of the circumstances in which the goods or services are supplied. Whether the operation of the MAP was an economic activity was a question of mixed fact and law. There were, however, several factors which ultimately supported the conclusion that the taxpayer was not carrying on an economic activity.

First, the supply was not made for the purposes of obtaining income on a continuing basis. In this case, based on the witness evidence given on behalf of the taxpayer, it was clear that the MAP was not operated for the purpose of obtaining income. 

Second, the service could not be provided by a third party supplier and the supply (if there was one) was one that could only be made between employer and employee. One of the factors to be considered in determining economic activity is whether the services identified are offered on the general market or likely to be carried on by a private undertaking on a market for the purpose of generating profit (Wakefield and Banque Bruzelles Lambert SA v Belgium (C-8/03)). The UT concluded in this case that  the answer was clearly no. It was significant that the taxpayer was acting as an employer in making deductions of tax and NICs in accordance with the law. The fact that other employers offered similar schemes to MAP did not show a general market, but instead many individual markets. Each employer could only offer the scheme to its own employees. This contrasted with the position in Astra Zeneca where the vouchers provided by the employer to its employees could have been provided by a third party independent of the employer/employee relationship.

Comment

The approach set out in Wakefield, sets out the correct test to be applied in the context of establishing what is an economic activity (at least for now). The UT's decision also contributes to our understanding of how that approach will be applied by providing some welcome guidance on how to determine whether there is a supply of services for consideration. It reinforces the need for an activity to be carried on for a commercial purpose.

More generally, Pertemps is a reminder that the nature of a supply in VAT terms goes beyond mere discount and adjustment. Not all salary sacrifice schemes will result in a supply taking place for VAT purposes by the employer to the employee, nor will the fact that these may lead to temporary cash flow advantages mark them out as economic activities. It will be interesting to see if HMRC decides to appeal this decision to the Court of Appeal.

The decision can be viewed here.