Mainpay just lost (again), costing the umbrella company dearly, but its contractors nothing

As a judgment handed down on August 16th 2024 shows, Mainpay, an umbrella company, has been back to the Upper Tribunal (UT) to appeal the decision regarding the deductibility of travel and subsistence (T&S) expenses, writes Rebecca Seeley Harris, founder of ReLegal Consulting. 

The salient points, covered in my initial article ‘Mainpay V HMRC has only minor Travel & Subsistence implications - but still, contractors must beware,’ were whether Mainpay’s workers were temporary workers, and whether they were working under a contract of employment or an agency contract. 

What Mainpay was contesting

In addition to that, whether there was an overarching contract of employment or a single deemed employment and whether the workplace was permanent or not.

The FTT found (in December 2023) that there was no overarching contract of employment and that the workplaces were permanent, with the effect that any T&S expenses relating to individual contractors’ attendance at such a workplace were not deductible.

Warning

This case relates back to the period prior to April 6th 2016, when the rules on travel and subsistence changed, as did Mainpay’s structure.

So, this is a historic case. And one which will now cost Mainpay dearly (at the FTT, the total amount was said to be around £135,000 reduced from £150,000 due to HMRC errors), but fortuantely for once, not one that costs the contractor. 

That said contractors, if you do come across any umbrella companies who are still offering travel and subsistence expenses in 2024, do not get involved.

Mainpay’s five grounds for appeal at the Upper Tribunal

There were five bites of the cherry by the brolly to get its subsistence expenses deductions approved -- so five grounds of appeal at the UT -- and these were each based on errors which Mainpay said were made by the FTT.

The five grounds for appeal were:

1. That the 2013 contract was not an overarching contract of employment;
2. That the successive assignments under the same overarching contract represented single employments;
3. That the FTT’s interpretation of “regularly attends” was wrong;
4. That the FTT erred by concluding that Mainpay were not permitted to use reasonable estimates of expenditure to calculate deductions; and
5. That the FTT erred by concluding that Mainpay had been careless.

It’s not necessary here to go through each ground separately, as the conclusion at the UT was that all grounds were dismissed -- meaning the FTT made no error of law.

There are, however, some interesting points that may be of interest to the contractor or umbrella company worker.

Mutuality of obligations

The tribunal noted that the UT had considered mutuality of obligation in the context of an overarching contract in Exchequer Solutions Ltd v. HMRC [2024].

For further details see my article for ContractorUK, 'Exchequer Solutions Ltd just lost its expenses appeal. Here’s what the binding ruling backing HMRC really means.' 

The UT had agreed with the principles that:

1. “The mutuality of obligation is not simply that required for a contract to exist but must be mutuality which is such as “to locate the contract in the employment field.”
2. “The mutuality must exist throughout the whole of the period of the contract including the gaps between assignments”.
3. “There is some scope for flexibility around the nature and extent of the obligation to work. An obligation to do the work if offered and an obligation to pay a retainer if no work was offered would be sufficient.”

The UT also referred to the Court of Appeal decision in HMRC v. Atholl House [2022] EWCA, and found that “there was a sufficient obligation on Mainpay in the gaps between assignments, but not on the workers.”

Ultimately, the UT decided that the clause in the 2013 contract for a worker to “consider any suitable assignments obtained by the company” did not create the “necessary mutuality of obligation on the part of a worker.”

Loss of tax brought about by carelessness

An interesting part of the UT’s judgment was whether Mainpay had taken “reasonable care” or not.

Well, the umbrella said they had taken "appropriate advice" and that they had consulted an employment lawyer about a tax issue, despite having a tax adviser who they did not ask.

So, the tribunal said that “reasonable care” was not taken.

This is very poignant because Mainpay had an accountant, who was an external adviser, an employment lawyer from a very reputable firm -- Mischon de Reya and a tax adviser but, they did not take “reasonable care” because they did not give the relevant information to these advisers.

The relevance of carelessness is that HMRC can charge penalties, whereas if it was just a mistake, there would be no penalties. 

Independent contractor

Mr Firth KC, appearing for Mainpay, also argued that “the FTT wholly failed to deal with the Appellant’s submission that Mr Hugo was an independent contractor and it was reasonable for Mainpay to rely on him to obtain the appropriate advice.”

The tribunal disagreed. 

The UT stated that: “The mere fact that Mr Hugo [the accountant] was a consultant does not, however, establish that Mainpay took reasonable care in relying on his advice, any more than it did from the mere fact that Mishcon was a respected law firm.”

Basically, Mainpay cannot simply rely on advice where it failed to ask any of the advisers for advice “which was crucial to the effectiveness of the proposed arrangements.”

Conclusion

If the umbrella company industry was regulated, these practices (travel and subsistence expenses deductions) could be outlawed.

So, it is now over to the Labour government to bring about reforms and introduce legislation. The government has promised a Single Enforcement Body under a different name (the Fair Work Agency) but, nothing has yet been confirmed.