Reed Employment First Tier Tribunal

In recent days there has been a flurry of marketing activity from various providers suggesting that, in light of the Reed Lower Tribunal case, all employers must revisit and review their salary sacrifice arrangements. In this edition of Insight we highlight the key issues arising in the Tribunal’s findings so that employers may make informed decisions rather than arrange unnecessary, costly reviews.

1. The Background

The case surrounds HMRC’s challenge against what could probably be best described as the first, embryonic salary sacrifice arrangements in the UK. The scheme was introduced in 1998 by the Reed group of companies (Reed) and HMRC’s challenge “only” surrounds travel and subsistence payments made under the arrangements between 2001 and 2006 at which point Reed made changes to the scheme which no longer caused HMRC concern. The reported liability of £158 Million refers only to this period of time (which also demonstrates how large a scheme this was).

2. The Issue

We mention that the Reed case was embryonic because its structure and method was very much at odds with what is now regarded as standard practice for salary sacrifice agreements. It is important to note that what is now considered the “norm” such as payslip design, communicating the potential downside to salary sacrifice and giving employees the opportunity to retain the higher gross salary did not widely exist back then. Furthermore, whilst the Tribunal did indeed comment on the salary sacrifice being seemingly ineffective, this was not even the eventual reason given for the tax and NIC liability to arise – this was more sector specific and involved the contracts being regarded as temporary in nature.

3. The Implications

It is clear that in recent years, salary sacrifice arrangements now have very clear principles through which the majority of employers operate and the understanding of the need for permanent contracts and clear communication has been well established. The array of materials provided to employees through well-structured salary sacrifice arrangements address all of the failings of Reed’s arrangements in these early years and therefore should not cause additional concern.

4. So What Can Be Learned?

One area of concern we do have surrounds organisations using salary sacrifice literature from all of the different providers of benefits such as childcare vouchers and cycle to work schemes. It is important to ensure that all salary sacrifices are communicated in a way which reflects best practice and from our experience, the only way to ensure this happens is to group all documentation into one, over-arching policy. The salary sacrifice agreements of benefit providers have become increasingly sophisticated and tax aware in recent years but any employer seeking confirmation that their arrangements do indeed fulfil all of HMRC’s criteria can then have their arrangements reviewed quickly and cost efficiently.

However, the marketing “machines” at many providers have seen an opportunity to charge potentially significant, consulting fees for completely revisiting salary sacrifice arrangements in all organisations and are promoting the need for this to be a priority. As a basic concept this is perhaps fair – as mentioned above a salary sacrifice arrangement does, of course, need to be effective but that is not new news arising from the Reed case – that has always been the case and in this respect nothing significant has changed.

Should you have any queries then please do not hesitate to contact the Cobia team on 0845 226 0580.