Court of Appeal upholds HMRC’s position on umbrella company tax liabilities
The Court of Appeal has confirmed that umbrella companies cannot treat separate assignments as a single continuous employment for tax purposes and that a failure to take proper advice on contractual arrangements can amount to carelessness leading to a loss of tax.
Background
In the case of Mainpay Ltd v HMRC, an umbrella company provided payroll and administrative services for temporary workers in sectors such as education and healthcare. Mainpay argued that its workers were employed under a single ongoing contract, meaning each assignment they undertook was a temporary workplace. This would have allowed travel and subsistence payments to be reimbursed tax-free.
HMRC disagreed, arguing that each assignment was a separate employment and therefore a permanent workplace for tax purposes. If that was correct, the expenses were not deductible and should have been subject to income tax and national insurance. HMRC also said that some of its tax assessments, which fell outside the usual time limit, were valid because the loss of tax had been caused by Mainpay’s carelessness.
Both the First-tier Tribunal and the Upper Tribunal rejected Mainpay’s appeal, finding that there was no overarching contract of employment and that the company had failed to take reasonable care in relying on limited legal advice that did not properly address the tax implications of its arrangements.
Decision
The Court of Appeal dismissed Mainpay’s further appeal. It agreed that, even though the same written contract governed the relationship between the company and its workers, the contract operated as a series of separate employments rather than a single continuous employment. Periods between assignments could not be treated as part of ongoing employment because there was no obligation on either party to provide or accept work during those gaps.
As a result, each workplace attended by a worker on an assignment was a permanent workplace for tax purposes, and the travel and subsistence expenses paid were not tax-free.
The Court also confirmed that HMRC had established a causal link between Mainpay’s carelessness and the loss of tax, rejecting the argument that causation had not been adequately pleaded. It upheld the lower tribunals’ conclusions that HMRC’s extended six-year assessment period therefore applied. The Court did not disturb the finding that Mainpay had been careless, but noted that the threshold for overturning such a case management-type decision was “commensurately high".
Learning points for employers
This decision provides a clear warning for umbrella companies and other employers operating non-standard working models. Where contractual or tax arrangements are complex, reliance on general legal advice may not be enough to demonstrate reasonable care. Employers must ensure that their contracts and pay structures are reviewed by advisers with relevant tax expertise, particularly where arrangements are designed to achieve a specific tax treatment.
The case also confirms that tribunals and courts will look at how arrangements operate in practice, not simply at the wording of the contract. For umbrella companies, this means that each temporary assignment is likely to be treated as a separate employment unless there is clear mutual obligation and continuity between assignments.
Employers who rely on models involving multiple short-term engagements should review their documentation and expense policies to ensure they are compliant with HMRC guidance and do not inadvertently create tax exposure.