United Kingdom


  • Service: Tax, Employment Issues
  • Type: Business and industry issue
  • Date: 26/01/2012

Salary Sacrifice post Reed Employment Case 

 Following the ruling on the Reed Employment case, KPMG has put together an in depth commentary detailing the decision and potential ramifications for all employers with salary sacrifice arrangements.


Companies should use the case to review their current salary sacrifice schemes, making sure they are robust, but also consider additional areas where salary sacrifice could now be introduced with confidence.

 Reed Employment Plc v The Commissioners for HM Revenue and Customs


The recent decision from the First-tier Tribunal case of Reed Employment plc (and other Reed Group companies) v The Commissioners for HM Revenue and Customs has now been issued.  The case considered the employment tax treatment of a travel and subsistence arrangement that was purported to be a salary sacrifice arrangement.  It is thought that Reed is likely to appeal the ruling.


Reed made daily payments to cover lunch and commuting to around 500,000 temporary workers between 1998 and 2006, which they maintained was part of a salary sacrifice arrangement.  The FTT found that the schemes operated did not constitute an effective salary sacrifice arrangement, as in reality no part of the salary was sacrificed.  The tribunal judges said “The salary was paid in full, even if there was a later manipulation”.  In addition, it was ruled that the employed temps were engaged under a series of job-by-job contracts rather than under a continuing contract of employment.  Each assignment should therefore be treated as a separate engagement, and as a result the travel was therefore to a permanent workplace and the expenses were deemed to be ordinary commuting and non-deductible.


This decision turned on the contractual arrangements in place, the clarity of the arrangement in place and the fact that a salary sacrifice was found not to exist.  The tax and NIC, along with interest, has been calculated at £158m. 

The contractual arrangements were much discussed and show the need to carefully draft a contract of employment and to ensure the terms of the contract are fully understood by all.  In the present case there was much made of the fact the employees could not understand their pay calculation.

KPMG comment: “The starting point for any successful arrangements is a correctly worded and understandable contract of employment which in this kind of an arrangement, to be acceptable to HMRC, should be an overarching contract of employment guaranteeing at least 336 hours.”

The position put forward to the tribunal that a salary sacrifice existed was ultimately rejected by them and partly on the basis of the confusing contractual arrangements in place but comment was also made on the small savings enjoyed by the workers as the arrangement was designed to deliver the bulk of the savings to the employer.  The tribunal took the view that the employee could not understand what was happening to their pay from the payslip and that, in the tribunal view, a sacrifice by an employee should deliver a benefit to the employee.  The tribunal went further to say that this purported sacrifice delivered no or little benefit to the worker and was an arithmetical exercise to deliver the maximum savings to Reed.

KPMG comment: “In this case the tribunal reasoning that a salary sacrifice must deliver a benefit is potentially challengeable but the arrangement has to be transparent and to be understood and accepted by the employee if it is to be a valid sacrifice.  To avoid the view that ‘little or no’ benefit is made by the employee, an equitable sharing of the savings would also be advisable.”

In this case the tribunal found that HMRC were entitled to issue a dispensation where they had a belief that no tax was payable (even if they were wrong).  However, as they found the expenses paid were a part of the employee’s wages, and there was no salary sacrifice in place, the expenses should have been subject to PAYE and NIC.  In addition, they considered the effect if a valid salary sacrifice was found to be in place but took a view that the assignments were all fixed term employments and as such the expense allowance would be taxable; that is, the employee did not travel to temporary workplaces which would attract relief from tax.

KPMG comment: “When entering into these arrangements it is important not only to consider the contractual arrangements to be put in place but also important to ensure that the arrangement is communicated in a transparent way which demonstrates the worker was in agreement or had all the information to understand the arrangements affecting him/her.”

The tribunal did not decide on the “Reed’s legitimate expectation” point as that will be left for any further proceedings at the Upper Tribunal.  However, the question they stated to be answered was “Can HMRC be required to apply a dispensation that Reed had a legitimate expectation was in place and covered the allowances paid, even where HMRC had no power to grant a dispensation”.  The tribunal commented that as the disclosures made did not provide the full facts to HMRC this helps support HMRC’s contention that Reed had no “legitimate expectation” as it did not fully disclose all relevant matters.

KPMG comment: "In this kind of arrangement all the facts should be on the table and HMRC and other parties should fully understand the arrangements in place with this being supported by clear employee communications. If this had been the case here it would have aided the case that a legitimate view was held that the dispensation made the payment of expenses exempt from PAYE and NIC even if that dispensation was later found to be wrong.”


What should you do next?

This case will have possibly have far reaching implications for all employers entering into salary sacrifice arrangements (salary sacrifice arrangements can cover pensions, cars, bicycles, child care vouchers, flexible benefit schemes and many others).  We suggest that all these arrangements are reviewed to ensure they are compliant and importantly that the workers fully understand the arrangement they have entered into.  The Reed case highlights the pitfalls of getting it wrong. The employment contractual arrangements are also as important as the tax considerations. 

KPMG have experience of successfully implementing these arrangements and with the agreement of HMRC on a fully disclosed basis. Therefore do not be put off by this case if you are considering implementing a salary sacrifice as they can be implemented successfully. These arrangements can realise considerable savings for both the employer and the workers.


Colin PurdueColin Purdue

Senior Manager

0121 232 3438


Sue RobinsonSue Robinson


020 7311 3338


Sharon SmeethSharon Smeeth


Senior Manager

020 7694 4523


Ann Marie Robinson

Ann-Marie Robinson

Senior Manager


0121 335 2726 


John Weir

John Weir

Senior Manager


020 7694 4029 


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