Do travel expenses constitute a salary sacrifice?

This issue was discussed in the recent case of Reed Employment v HMRC at the Court of Appeal.  

Reed is an employment business which employs its temporary workers. Prior to 1998, there was no available tax relief on a worker’s travel expenses to a temporary place of work and Reed paid its employed temps calculated as the multiple the agreed hourly rate and the number of hours worked.

In 1998, Reed started arrangements that enabled it to benefit from the already available tax reliefs by making non-taxable payments to its employed temps for their travel expenses. 

Reed set up two sets of arrangements. The first set of arrangements, the Reed Travel Allowance (RTA) operated from 1998 until 2002. RTA provided that an employed temp would receive an extra £1.50 a day for each day they worked over 5 hours with the same client, or a lesser amount if they worked for less than 5 hours. However, it was found that the net sum received by the employed temps was the same as they would have received in the absence of the RTA Scheme. There was nothing in the contractual terms or the handbook which was issued to the employed temps to suggest that the employed temps were giving anything at all in order to receive the benefit of expenses.

The second set of arrangements, the Reed Travel Benefit (RTB) operated from 2002 to 2006. The payments to Reed’s employed workers were calculated on the basis of the hours worked by the temps. The travel expenses were paid on the top of those payments. There was no suggestion that a different hourly rate applied to employed temps if they received a travel allowance.

Reed argued that both the RTA and the RTB set of arrangements constituted a ‘salary sacrifice’ and that as a result Reed was entitled to pay tax free expenses to its employed temps.

In order for a salary sacrifice to operate, one of the conditions is for the employee to agree to a wage reduction, in exchange for a benefit. The salary sacrifice arrangement should be reflected in the contractual terms and in reality.

If there is a salary sacrifice arrangement in place, the benefit which is received by the employee in return for them sacrificing a part of their salary is not subject to tax and National Insurance Contributions, resulting in tax savings for both the employee and the employer.

However, the Court of Appeal found that both the RTA and RTB arrangements did not require the employed temps to ‘sacrifice’ any part of their salary in order to be entitled to receive travel expenses. The Court of Appeal agreed with HMRC that under the arrangements, Reed made single global payments to its employed temps, in which the payment on account of travel expenses was simply part of the employed temps overall wages. Therefore Reed was not entitled to benefit from tax relief by paying its employed temps tax free expenses.

Given the historic nature of the case and its facts it is unlikely to impact upon any current arrangements involving tax reliefs to a temporary place of work. However, it remains the case that any salary sacrifice must be reflected in an employee’s contract.