Court of Appeal finds expenses paid by an umbrella company were taxable

In Mainpay Ltd v HMRC [2025] EWCA Civ 1290, the Court of Appeal (CofA) has confirmed that travel and subsistence expenses paid by an umbrella company to its employees were taxable.

Background

Mainpay Ltd (Mainpay) was an umbrella company employing temporary workers that were supplied to agency companies specialising in the education, health and social care sectors. 

Mainpay reimbursed its workers under section 338, Income Tax (Earnings and Pensions) Act 2003, for travel and subsistence expenses free of income tax and claimed that the workers were employed under a single overarching continuous contract of employment, with each separate assignment being a temporary workplace.

HMRC was of the view that each work assignment was a separate employment at a permanent workplace and therefore the travel and subsistence expenses were not deductible for income tax and national insurance purposes and issued determinations and notices accordingly. 

HMRC also sought to argue, in respect of two tax years, that Mainpay had brought about the relevant loss of tax carelessly.

Mainpay had been unsuccessful in its appeals before the First-tier Tribunal (FTT) and the Upper Tribunal (UT), and appealed to the CofA. 

CofA judgment 

The CofA dismissed the appeal. 

With regard to the travel and subsistence expenses, the Court found that Mainpay did not have single, overarching employment contracts with its workers, and therefore the reimbursed travel and subsistence expenses were taxable.

In reaching its decision, the Court concluded that the correct analysis was that there was intermittent employment under a contract of employment when a worker was on an assignment followed by periods when there was no contract of employment and therefore no employment in the gaps between assignments. There was therefore no single overarching employment but rather successive employments. 

The Court also found that each assignment represented a permanent workplace and it did not therefore need to consider whether the travel and subsistence expenses were payable tax-free.

Accordingly, HMRC was entitled to recover PAYE on the travel and subsistence payments that had been made free of income tax. 

With regard to the second issue, the Court found that Mainpay had acted carelessly by failing to take appropriate advice. Mainpay had relied on assurances provided by lawyers rather than seeking advice from tax specialists. The Court agreed with the FTT, which had applied a causal test and concluded that Mainpay's failure to take reasonable care had led directly to the loss of tax arising from treating the expenses as deductible. As a result, the 6 year extended time limit applied in relation to the loss of tax which had been brought about carelessly. 

Comment

The Court of Appeal has confirmed that for HMRC to benefit from the 6 year extended time limit for making a discovery assessment based on a taxpayer's careless conduct, it must establish a causal link between the taxpayer's carelessness and the loss of tax. 

This case also illustrates the high level of care that must be taken by advisors and their clients to ensure that they adopt the correct approach when seeking to make payments to employees tax-free. 

Professional advisors should always give careful consideration to whether they have the necessary expertise to provide specialist tax advice. 

The judgment can be viewed here.