The Best Connection Group Limited v The Commissioners for HMRC

The legislation relevant to the appeals in the form which it took at the relevant time is summarised below.

Section 6 of the Income Tax (Earnings and Pensions) Act 2003 (the “ITEPA”) imposed a charge to income tax on general earnings.

General earnings were defined in Section 7(3) of the ITEPA as meaning:

Section 8 of the ITEPA provided that income was exempt income if, as a result of an exemption in Part 4 of the ITEPA or elsewhere, no liability to income tax arose in respect of it as income.

Under Section 9(2) of the ITEPA, the amount of general earnings which was subject to tax was the net taxable earnings of each employment.

Under Section 11 of the ITEPA, the net taxable earnings of each employment was defined as the total amount of taxable earnings from the employment less the total amount of deductions allowed from those earnings.

Section 62(2) of the ITEPA, which was in Chapter 1 of Part 3 of the ITEPA, provided that earnings meant, inter alia, any salary, wages or fee.

Section 70 of the ITEPA, which was in Chapter 3 of Part 3 of the ITEPA, stated that a sum paid to an employee in respect of expenses and which was so paid by reason of employment fell within the scope of the chapter to the extent that the relevant sum did not already constitute earnings from employment under any other provision.

Section 72 of the ITEPA provided that the relevant sum was treated as earnings from the employment for the tax year in which it was paid.

Part 4 of the ITEPA set out provisions relating to exempt income.

Section 229 of the ITEPA, which was in Part 4 of the ITEPA, provided that no liability to income tax arose in respect of approved mileage allowance payments for private cars, vans, motorcycles and cycles falling within Section 235 of the ITEPA. For this purpose:

Part 5 of the ITEPA set out provisions relating to the deductions allowed from earnings. For the purposes of this decision, the key provisions in Part 5 of the ITEPA were:

In relation to an expense falling within Sections 337 or 338 of the ITEPA:

Section 359 of the ITEPA provided that no deduction could be made under the travel deductions provisions in respect of those travel expenses incurred in connection with the use by the employee of a private vehicle if, inter alia, mileage allowance payments were made to the relevant employee.

From the above summary of the legislation, it can be seen that:

Prior to its repeal in the Finance Act 2015, Section 65 of the ITEPA made provision for the Respondents to provide a dispensation from the usual application of the legislation in certain specific cases. At the time which is relevant to this decision, the section provided as follows:

This section applies for the purposes of the listed provisions where a person (‘P’) supplies an officer of Revenue and Customs with a statement of the cases and circumstances in which –

payments of a particular character are made to or for any employees, or

benefits or facilities of a particular kind are provided for any employees,

The ‘listed provisions’ are the provisions listed in s 216(4) (provisions of the benefits code which do not apply to lower–paid employments).

If an officer of Revenue and Customs is satisfied that no additional tax is payable by virtue of the listed provisions by reference to the payments, benefits or facilities mentioned in the statement, the officer must give P a dispensation under this section.

A ‘dispensation’ is a notice stating that an officer of Revenue and Customs agrees that no additional tax is payable by virtue of the listed provisions by reference to the payments, benefits or facilities mentioned in the statement supplied by P.

If a dispensation is given under this section, nothing in the listed provisions applies to the payments, or the provision of the benefits or facilities, covered by the dispensation or otherwise has the effect of imposing any additional liability to tax in respect of them.

If in their opinion there is reason to do so, an officer of Revenue and Customs may revoke a dispensation by giving a further notice to P.

That notice may revoke the dispensation from –

the date when the dispensation was given, or

a later date specified in the notice.

If the notice revokes the dispensation from the date when the dispensation was given

any liability to tax that would have arisen if the dispensation had never been given is to be treated as having arisen, and

P and the employees in question must make all the returns which they would have had to make if the dispensation had never been given.

If the notice revokes the dispensation from a later date –

any liability to tax that would have arisen if the dispensation had ceased to have effect on that date is to be treated as having arisen, and

P and the employees in question must make all the returns which they would have had to make if the dispensation had ceased to have effect on that date.”

The ‘listed provisions’ in Section 216(4) of the ITEPA (as mentioned in Section 65(2) of the ITEPA) included the provisions in Chapter 3 of Part 3 of the ITEPA.

The parts of Section 65 of the ITEPA allowing the Respondents to revoke a dispensation with either retrospective or prospective effect – which is to say Sections 65(6) to 65(9) of the ITEPA – were preserved by Sections 12(6) to 12(8) of the FA 2015 when Section 65 of the ITEPA was generally repealed.

Regulation 72 of the PAYE Regulations provided that, where the amount deducted by an employer by way of income tax from payments which it had made was less that the amount which the employer was liable to deduct from those payments, then the Respondents might direct that the employer was not liable to pay the excess as long as, inter alia, the employer satisfied the Respondents that:

Regulation 72A of the PAYE Regulations made provision for an employer to request the Respondents to make a direction under Regulation 72 of the PAYE Regulations on the basis that the conditions in paragraph 30 above were satisfied and for the employer to appeal to the FTT against any refusal by the Respondents to make such a direction.

Regulation 80 of the PAYE Regulations provided that, if it appeared to the Respondents that an employer might have failed to deduct income tax which was payable for a tax year, the Respondents could determine the amount of that tax to the best of their judgment and serve notice of that determination on the employer.

With effect from April 2009, the Respondents introduced a system of “benchmark scale rates” (the “BSR”) in respect of subsistence expenses – see Brief 24/09 published on 2 April 2009. This was for the administrative convenience of both taxpayers and the Respondents. Before that change, it had been up to each employer on an individual basis to agree its own specific approved scale rates with the Respondents. Under the BSR:

In relation to the present appeals, it is common ground that, although the income tax and NICs regimes operated in a slightly different manner, there was no meaningful difference in the results of their operation in the present context.

At the relevant time, Class 1 NICs were payable by reference to the relevant employee’s earnings pursuant to Section 6 of the Social Security Contributions and Benefits Act 1992 (the “SSCBA”).

Section 3 of the SSCBA, which defined earnings, required them to be calculated in accordance with the provisions of the Social Security (Contributions) Regulations 2001 (SI 2001/1004) (the “NICs Regulations”).

Regulation 25 of, and Part VIII of Schedule 3 to, the NICs Regulations provided for payments in respect of travelling expenses and payments in respect of motoring expenditure which did not exceed the mileage allowance to be disregarded – see paragraphs 1, 3 and 7A of Schedule 3 to, and Regulation 22A of, the NICs Regulations.

Regulation 67 of, and Schedule 4 to, the NICs Regulations provided for NICs to be paid, accounted for and recovered in the same way as income tax.

The NICs legislation did not contain an equivalent provision to Section 65 of the ITEPA so that, technically, a dispensation under that section did not apply for the purposes of NICs. However, the Respondents have conceded that, for the purpose of the appeals against the NICs Decisions, expense reimbursement payments falling within the terms of a dispensation can be disregarded when calculating earnings for NICs purposes.

At the hearing, we were referred to various publications by the Respondents dealing with payments in respect of travel and subsistence expenses and the interaction of salary sacrifice arrangements with such payments.

For example, on 28 March 2014, the Respondents published guidance in relation to the income tax and NICs treatment of business travel by employees (“Guidance 490”). That guidance included the following:

We were also referred to 2 consultation documents which had been issued in the period prior to the implementation of the BSS:

Paragraphs 3.16 to 3.19 of the Temp Condoc explained that, in most cases, travel expenses incurred by a temporary worker were not reimbursed in addition to the worker’s salary but were instead paid as part of a salary sacrifice arrangement. The paragraphs outlined how this gave rise to an income tax and NICs benefit for both employee and employer and stated that, in some cases, the employer would adjust the salary it paid to take account of the income tax and NICs benefits enjoyed by its employees so that the employees did not benefit from the entire tax saving which they would otherwise receive.

Paragraphs 3.19 to 3.24 of the Temp Condoc described the dispensation system. They said that:

Paragraph 5.5 of the Temp Condoc noted that overarching employment contracts along with the related tax benefits afforded in respect of travel expenses were used by employment agencies to increase their competitiveness in the employment sector.

The NMW Condoc explained how:

Paragraph 2.16 and 2.17 of the NMW Condoc noted that:

There are many different variations of travel and subsistence schemes in operation. It is worth emphasising that the availability of tax relief for travel expenses (and for the expenses to be disregarded for NICs) depends very much on the way in which all these arrangements are implemented. For example, the overarching employment contract must be valid, creating a single employment and the employee must, on the basis of the facts and supporting evidence, be incurring expenses in travelling to a temporary workplace. If, for any reason, the arrangements as implemented are not effective in securing tax relief, then the expenses will be taxable and liable to NICs.

HMRC polices these arrangements and takes action where appropriate to deal with non– compliance with the PAYE, NICs and NMW rules.”

Finally in this context, in explaining the concept of salary sacrifice in their Employment Income Manual, the Respondents said as follows at paragraph EIM42752:

Most of the facts which are relevant to the appeals are not in dispute either because they are a matter of documentary record or because the parties indicated at the hearing that they were agreed. Those facts are as follows:

Much of the evidence with which we were provided at the hearing was common ground and has accordingly already been outlined in paragraph 49 above. However, we describe below some of the other evidence with which we were provided. That evidence took 2 forms – sample documents from the 4 tax years in question, showing how the BSS was applied in practice in the sampled cases (together, the “Samples Documents”), and witness evidence.

The samples in the Samples Documents had been selected at random by the parties and covered selected weeks and selected participants within those weeks. The samples for the tax year ending 5 April 2013 are referred to in what follows as “2012/13 Samples” and the same style has been adopted in relation to the other tax years during which the BSS operated. Where available, the samples in the Samples Documents included declarations made by the sampled participants on registration, Staff+ Reports, ERFs and BestEx Reports so that it was possible to see how the BSS operated in practice for each sampled participant. However, not every participant in the Samples Documents had returned an audit form for the period sampled and some of the documents relating to participants had been destroyed by the relevant participant’s branch pursuant to TBC’s document destruction policy. Thus, not every sample in the Samples Documents contained all of the above documents in each case.

The Samples Documents revealed that:

We heard the testimony of 8 witnesses altogether – 7 on behalf of TBC and 1 on behalf of the Respondents.

The chief witness for TBC was Mr Sweeney. Although there were some occasions in giving his testimony when he was slow to acknowledge obvious defects in the way in which the scheme had operated, we generally considered Mr Sweeney to be an honest and credible witness who did his best to be helpful.

Much of Mr Sweeney’s evidence was not disputed and has accordingly been taken into account in our summary of the agreed facts set out in paragraph 49 above. However, in addition, Mr Sweeney said that:

The other witnesses for TBC were 4 managers – Mr Paul Crocock, Mr Danny Keyes, Mr Wayne Tighe and Mr Dipak Patel – and 2 HGV drivers – Ms Rachel Lawrence and Mr John Bramwells.

The evidence given by the branch managers was largely directed at the extent to which they understood the details of the BSS, how they were trained in relation to it, the way in which the process of interviewing participants was conducted and the way in which the ongoing relationship between participants and the branches was managed.

The evidence given by the drivers was largely directed at their relationship with the relevant branch and the extent to which they understood the details of the BSS.

In listening to the evidence of the drivers and managers, we took into account the fact that it had been over 8 years since the scheme had ceased and over 12 years since the scheme had first been implemented. Moreover, in the case of the drivers, the scheme was not necessarily the only travel scheme in which they had participated because they were employed by other companies that had adopted salary sacrifice schemes and, in the case of the managers, the scheme was just one aspect of the overall employment issues with which the managers had had to deal. It was therefore not surprising that their evidence was confusing and contradictory in places. We were satisfied that each manager and driver was honest and was doing his or her best to provide us with the information we required to reach our conclusions as to the facts.

Although the testimony which was given by each manager and driver in relation to the above matters differed slightly, the key points arising out of that testimony were as follows:

The only witness for the Respondents was Officer Karen Dalton, the officer responsible for issuing the 2013 Determination.

Since Officer Dalton’s evidence is relevant solely to the question of whether or not the 2013 Determination was issued to best judgment, we need first to provide the background to that evidence in order to set it in context.

On 22 February 2017, Officer Dalton wrote to Mr Sweeney enclosing the 2013 Determination and explaining that the determination was being made for protective purposes because it would shortly become time–barred. In that letter, Officer Dalton noted that the determination was “not an indicator of the final settlement and will not be enforced until notice is given” but she did not set out the basis on which the determination had been calculated. It is common ground, however, that the 2013 Determination was in the amount of £3,353,520 and related to both the BTR (which is now settled) and the BSS.

After a response to that letter by Mr Peter Wilson, the representative of TBC, on behalf of TBC, on 14 March 2017, Officer Dalton sent an email to Mr Wilson on 22 March 2017. In that email, Officer Dalton explained the quantum of the 2013 Determination as follows:

Following a request by Mr Wilson on behalf of TBC on 23 March 2017 to have the 2013 Determination reviewed, Officer CW Agg of the Respondents wrote to notify TBC of the results of his review on 19 June 2017. In that letter, Officer Agg said that:

On 6 February 2023, Officer Dalton provided her first witness statement in relation to the proceedings. In paragraphs [143] to [152] of that statement, Officer Dalton described the methodology she had used to calculate the component of the aggregate amount set out in the 2013 Determination which was referable to the BSS as follows:

On 10 July 2023, Mr Sweeney provided his third witness statement in relation to the proceedings. In paragraphs [97] to [111] of that witness statement, Mr Sweeney pointed out a number of problems with the methodology described by Officer Dalton described in paragraph 66 above. In particular, he drew our attention to the following errors:

On 13 September 2024, a week before the start of the hearing and 14 months after Mr Sweeney’s third witness statement, the Respondents applied to admit a further (third) witness statement for Officer Dalton. We exercised our discretion to admit that witness statement (but not its exhibits) for the reasons we describe in the Appendix to this decision.

In her third witness statement, Officer Dalton said as follows:

We regret to say that we did not form a favourable impression of Officer Dalton as a witness. Leaving aside the contradictions between her initial explanation of the 2013 Determination in her email to Mr Wilson of 22 March 2017 and each of the 2 witness statements described above, we found her oral evidence to be vague, evasive and unilluminating. Having said that, the following were the relevant parts of her testimony insofar as it pertained to the question of best judgment:

Based on the agreed facts and the evidence with which we were provided at the hearing, we make the following findings of fact in addition to the agreed facts:

Now that we have recorded the facts which are relevant to our decision, we will briefly summarise the issues between the parties.

The Respondents maintain that:

Before doing so, there is one overarching point which we should make by way of introduction to our analysis of the issues. This is that, in addressing the 6 issues, we will necessarily deal with each of the 3 categories of entitlement as giving rise to distinct and separately–identifiable payments to the relevant participant. We will do that because each of the categories gives rise to different issues from the tax perspective. It is therefore necessary address the issues on that basis and that was how the parties framed their submissions to us at the hearing.

However, the reality is a little more complicated than that because of the way in which the scheme as a whole was implemented, as explained above. The effect of operating a single overall carried forward pool of entitlements and then making a single payment under the scheme each week is that identifying the extent to which a particular category of entitlement was reflected in the payment which was made under the scheme in a particular week is not necessarily a straightforward task. However, that is an issue which is best deferred until the question of quantum falls to be addressed. For present purposes, we will refer in the analysis that follows to payments falling within a particular category as if the nature of each payment that was made under the scheme was readily identifiable by reference to its constituent entitlements.

The first area of dispute between the parties – which applies to all 3 categories of payment – arises as a result of the Respondents’ contention that there was no valid salary sacrifice as a matter of contract law. The Respondents do not dispute that there was a valid contract between TBC and each participant but they say that that contract did not contain valid provisions to the effect that the participant would give up salary in return for the payments in question because the terms on which that was to occur were too uncertain to be binding on the parties.

In response, TBC submits that the terms in question were sufficiently clear to mean that there was a valid salary sacrifice as a matter of contract law.

In this decision, we will refer to this issue as “Issue One”.

The second area of dispute between the parties – which also applies to all 3 categories of payment – arises as a result of the Respondents’ contention that, even if there was a valid salary sacrifice as a matter of contract law, the payments in question were what the Respondents call in their published guidance free–standing “round sum allowances”, taxable as earnings under Section 62 of the ITEPA and Section 3 of the SSCBA, because they were made regardless of whether the mileage or expenses to which they purportedly related were actually incurred. The Respondents say that, in effect, each payment was not intended to be a genuine estimate of the expense to which it purported to relate, as described by Walton J in Donnelly v Williamson [1982] STC 88 at 97 – 98 and did not reveal a genuine endeavour to produce an equivalence between the relevant payment and the expenditure, as described by Etherton LJ in Cheshire Employer and Skills Development Limited v The Commissioners for Her Majesty’s Revenue and Customs [2012] EWCA Civ 1429 (“Cheshire”) at paragraphs [44] to [59].

In response, TBC submit that there was a clear intention on its part to make payments to participants only in circumstances where the mileage or expenses in question had actually been incurred. There was thus a clear causal link between the mileage or expenses in question and the payments made to the participants and the payments to the participants were therefore not round sum allowances.

In this decision, we will refer to this issue as “Issue Two”.

It is common ground that, if the payments in question were not round sum allowances, then they will still have given rise to an obligation on TBC to withhold and account for income tax and NICs unless:

This leads naturally to the third and fourth issues between the parties.

The third issue – which again applies to all 3 categories of payment – concerns how to determine whether payments in respect of mileage related to mileage that was actually incurred and how to determine whether payments in respect of subsistence or public transport expenses related to an expense of the relevant category that was actually incurred. The Respondents say that, because the system for determining the payments which were made was fundamentally flawed:

In response, TBC submits that the evidence with which we have been presented is sufficient for us to find that:

In this decision, we will refer to this issue as “Issue Three”.

The fourth issue concerns whether, in relation to a payment in respect of subsistence or public transport, even if:

In response, TBC submits that, except to the extent that a payment in respect of public transport expenses on any day related to public transport expenses that were actually incurred on that day of less than £3.20, in which case the amount by which £3.20 exceeded the expenses actually incurred fell outside the terms of the dispensation, the payments do fall within the terms of the dispensation.

In this decision, we will refer to this issue as “Issue Four”.

The next area of dispute between the parties arises as a result of TBC’s contention that, even if the Respondents are entitled to succeed on any of the above grounds so that TBC should have withheld and accounted for income tax and NICs in respect of the mileage and/or expenses payments, the Respondents should be directed to issue a Regulation 72 Direction in respect of the income tax payable in each of the tax years ending 5 April 2013, 5 April 2014 and 5 April 2015 on the basis that:

In response, the Respondents submit that, on the facts, TBC did not take reasonable care to comply with the PAYE Regulations in any of the tax years described above so that, even if its failure to withhold and account for the income tax was due to an error made in good faith, it is not entitled to a Regulation 72 Direction in respect of the income tax payable in any such tax year.

In this decision, we will refer to this issue as “Issue Five”.

The final area of dispute between the parties arises as a result of TBC’s contention that the 2013 Determination was not issued to the best of the Respondents’ judgment, as was required by Regulation 80(2) of the PAYE Regulations and that therefore we should hold that the 2013 Determination was invalid.

The Respondents accept that, if the 2013 Determination was not issued to the best of their judgment, then the FTT does have the power in appropriate circumstances to determine that the 2013 Determination was invalid. However, the Respondents submit that the 2013 Determination was issued to the best of their judgment.

In this decision, we will refer to this issue as “Issue Six”.

As regards Issue Six, for the reasons which we set out in detail in paragraphs 205 to 213 below, we do not think that we can determine that issue definitively without also addressing the question of quantum. Since the parties have agreed that this is to be a decision in principle and that questions of quantum are to be deferred to a later stage in the proceedings, we have set out in the section of this decision which addresses Issue Six our preliminary view on the issue but without reaching a final conclusion in relation to it.

Before turning to the issues described above, we should mention that, at the start of the hearing, we were required to deal with a number of procedural disputes between the parties as a result of late applications by the Respondents to amend the SOC and to adduce additional witness evidence. We have described those procedural disputes, and our decisions in relation to them, in further detail in the Appendix to this decision.

However, we should record that, as a result of the applications, we necessarily spent a large part of the allocated reading day for the hearing considering the submissions of the parties in relation to the applications and then spent the entirety of the first day of the hearing listening to oral argument on them. It is regrettable that the Respondents chose to make so many changes to their case and to apply to adduce additional witness evidence as late as they did. It was unfair to TBC and its representatives and it inevitably disrupted our preparation for the hearing.

It was common ground that the contractual bargain between the parties included the terms of the FAQs.

However, Mr Vallat, on behalf of the Respondents, submitted that there was no binding agreement between TBC and each participant to the effect that the participant would sacrifice part of his or her salary in return for payments under the scheme in respect of mileage, subsistence expenses and public transport expenses. In support of that proposition, Mr Vallat said that:

In response, Mr Nawbatt and Mr Stone, on behalf of TBC, submitted that the mere fact that participants were unaware of a number of details in relation to the operation of the BSS did not mean that the term of the contract between each participant and TBC which provided for the participant to sacrifice salary in return for payments under the scheme in respect of mileage, subsistence expenses and public transport expenses was not contractually binding. Relying on the Court of Appeal decision in Openwork Limited v Alessandro Forte [2018] EWCA Civ 783 (“Openwork”), and the cases cited in Openwork, they said that those authorities showed that a court should try if at all possible to give effect to a term which the parties to the contract intended to be legally binding, even if the contract was silent as to some details.

Whilst we agree with Mr Vallat that there are circumstances in which a term in a contract can be too vague to be contractually binding, we do not think that the circumstances of this case fall within that category. It is apparent from the authorities that a contractual term which the parties intend to be contractually binding and whose overall effect is explicit but whose detailed terms are incomplete should be given effect by the courts.

In Openwork, the Court of Appeal considered whether a provision in a contract that provided for a clawback of commission was enforceable, notwithstanding the fact that the provision did not contain an express formula for calculating the clawback. In concluding that it was, the Court of Appeal referred to the authorities stipulating that courts should strive to give some meaning to contractual clauses agreed by the parties if it is at all possible to do so.

For example, in WN Hillas & Co Limited v Arcos Limited (1932) 147 LT 503 (“Hillas”), the House of Lords upheld the enforceability of an option to buy standards of softwood timber even though the option did not contain an option exercise price and there was no specification as to the type or quality of the timber. In so doing, Lord Wright said as follows:

Later, he added this:

In Openwork, the Court of Appeal referred to:

Applying the principles set out above in the present case, we think that there can be little doubt that both TBC and the participants intended the contract between them to include the salary sacrifice. We say that notwithstanding the view expressed by Mr Bramwells in his testimony to the effect that the salary sacrifice was not contractually binding. We think that that view flies in the face of all the other evidence with which we have been provided apart from the statement in the FAQs to the effect that the scheme was a “non–contractual arrangement” and, in our view, that statement should be construed, in context, as saying no more than that TBC reserved the right to terminate the scheme without facing a claim from participants to the effect that it was not entitled to do so. Indeed, the FAQs stated that, if a participant chose to opt out of the BSS at a later date, that would “constitute a variation to your contract” and that could hardly be the case if participation in the scheme, and the salary sacrifice which that necessarily entailed, were not intended to be contractually binding.

We agree that the participants were not made aware of the detailed terms on which the salary sacrifice would operate but that is no different from the clawback provision in Openwork or the option to buy standards in Hillas and, in both cases, the relevant court considered that the relevant provision should be upheld and sought to give effect to its terms. In this case, it was apparent from the written terms of the contractual documentation that the amount of salary that each participant would be required to sacrifice would be greater than the amount of the payment which the participant would receive in respect of mileage, subsistence expenses or public transport expenses and that an entitlement in respect of mileage, subsistence expenses or public transport expenses would be carried forward in circumstances where payment of that entitlement and the consequent adjustment to salary would take the participant below the NMW.

It is possible that, had a court been asked to resolve a contractual dispute between TBC and a participant as to a point of detail such as whether or not TBC was entitled to apply a de minimis in calculating the payment to be made in any week in respect of a participant’s entitlements or entitled to write off the overall carried forward pool of entitlements at a particular time, the court might have had difficulties in determining whether or not those were part of the terms on which the salary sacrifice was agreed. However, to quote Lord Wright in Scammell and Leggatt J in Astor, those are simply difficulties in interpreting the relevant terms. In this case, we do not have to consider the answers to those questions for the simple reason that there never was a dispute between the parties in relation to the terms of the salary sacrifice. Those difficulties in relation to the details do not mean that the salary sacrifice as a whole was too vague to be a valid and binding contractual term.

For the reasons set out above, we have concluded that the terms of the contract between TBC and each participant relating to the salary sacrifice were valid and therefore that TBC succeeds in relation to Issue One.

Mr Vallat submitted that all of the payments made to participants under the BSS were round sum allowances, in respect of which TBC was required to withhold and account for income tax and NICs, because the inadequacy of the checks relating to each of the 3 categories of payment meant that there was an insufficient causal link between, on the one hand, the incurring of the mileage, subsistence expenses or public transport expenses which were necessary to give rise to payments under the scheme and, on the other hand, the payments in question. The absence of any such causal link meant that, even if, in a particular case, the relevant mileage or expenses had actually been incurred, the payment in question would still be a round sum allowance and fall outside the exemption or dispensation, as the case may be. In other words, it was not sufficient for there merely to be a correlation in a particular case between mileage or expenses that were actually incurred and the payment in question. Instead, there needed to be a causal link between them.

In this regard, Mr Vallat distinguished between, on the one hand, a system like the present one which was fundamentally broken in terms of achieving that correlation and, on the other hand, a human error made in the course of operating a system which was fit for purpose. He said that, in the latter case, the necessary causal link did exist despite the human error. Whilst the human error might lead to the making of a payment which should not have been made – and that particular payment would then be incapable of falling within an exemption or a dispensation – that was a question to be addressed when considering whether that particular payment related to mileage or expenses that had actually been incurred (in other words, in the present case, at the stage when Issue Three fell to be considered). The mere fact that human error had led to that particular payment’s being incapable of falling within an exemption or dispensation would not invalidate the system as a whole and thus the payment in question, and the other payments made under the system, would not be round sum allowances.

Mr Vallat went on to say that the necessary causal link between mileage or expenses that had actually been incurred and the payments in question was not merely a matter of intention. By way of example, he referred to an employer which intended to make payments in respect of mileage or expenses that had actually been incurred but simply did not ask the employees in question whether the relevant mileage or expenses had actually been incurred before making the payments to the employees. In that case, the intention to make payments in respect of mileage or expenses that had actually been incurred would be present but the payments would nevertheless be round sum allowances because the necessary causal link would not exist.

In response, Mr Stone said that the legislation specified that it applied to a payment “for” mileage or a payment “in respect of” expenses incurred and thus there was no place in the statute for the sort of metaphysical distinction which Mr Vallat was seeking to draw. He said that, at this stage of the analysis, which is to say Issue Two, all that mattered was intention and that there was no reason to distinguish between, on the one hand, human error in implementing an effective system and, on the other hand, a defective system. He accepted that, when it came to Issue Three, it would be necessary to address the question of whether or not the mileage or expenses in respect of which the relevant payments had been made had actually been incurred. A payment made for mileage or an expense that had not actually been incurred could not fall within the exemption or the dispensation but that was a failure at the stage of considering Issue Three. All that mattered at the stage of considering Issue Two was the intention with which the payments had been made and, once a payment was made with the requisite intention, Issue Two should be determined in TBC’s favour regardless of whether the failure of that payment to relate to mileage or expenses that were actually incurred was down to human error within an effective system or down to a defective system.

The problem with Mr Vallat’s approach was that a system which was defective because it failed to identify that a relatively small number of payments had been made in circumstances where the mileage or expenses had not actually been incurred would lead all of the payments that had been made under the system to be characterised as round sum allowances. That could not be the right approach.

Mr Stone said that, in this case, notwithstanding the errors in the system, TBC’s intention in making payments under the scheme was clearly to confine those payments to circumstances where the relevant mileage or expenses had actually been incurred. That could be seen in the fact that:

Moreover, given the evidence of Mr Sweeney to the effect that most participants would have incurred subsistence expenses on the days they worked, it should not be assumed that a participant who did not check the subsistence box on his or her ERF had not incurred subsistence expenses. It was more likely in such cases that the relevant participant had simply made an error in completing his or her ERF.

In this case, at least in the case of payments in respect of mileage, it was apparent that a limited number of system errors had led to an insignificant number of cases where payments had been made incorrectly. However, even where system errors potentially led to a greater number of cases in which payments had been made incorrectly, the clear intention was that payments should be made only in circumstances where the relevant mileage or expenses had actually been incurred. It followed that the right approach was not to treat all of the relevant payments as round sum allowances but instead to identify those cases in which the system had led to payments’ being made in the absence of mileage or expenses that were actually incurred and subject just those payments to income tax and NICs.

We should start our analysis by saying that we do not agree with Mr Vallat’s propositions to the effect that:

Having said that, nor do we agree entirely with the position advanced by Mr Stone to the effect that this issue can be determined solely by reference to the stated intention of the employer in making the payments.

Instead, we think that the position is a little more nuanced than that and lies somewhere between those 2 positions.

We agree with Mr Stone that the starting point in determining whether or not payments are round sum allowances is to ascertain whether the intention of the employer in making the relevant payments was to do so only in circumstances where mileage or expenses have actually been incurred or instead to do so regardless of whether those circumstances existed. The latter would clearly be round sum allowances whereas the former would not.

However, we do not think that a stated intention to make payments only in circumstances where mileage or expenses have actually been incurred is enough in and of itself to avoid characterisation of the payments as round sum allowances if the evidence suggests that the stated intention was carried out so recklessly or negligently that the stated intention should be discredited. In other words, it is possible to conceive of circumstances where, even if the employer has said that its intention was to make payments only in circumstances where mileage or expenses have actually been incurred, that intention has been carried out so haphazardly that the stated intention is insufficient. Putting it another way, it is not enough for the employer to say that its intention was to make payments only in circumstances where mileage or expenses were actually incurred if the actions which the employer has taken in ostensibly giving effect to that intention casts doubt on that assertion. In effect, the intention needs be evidenced by the actions taken. To that extent we agree with Mr Vallat.

Where we do not agree with Mr Vallat is that we do not see why the dividing line in that regard is to be drawn between, on the one hand, a human error in the course of operating a system which is generally effective in identifying the circumstances in which mileage or expenses have actually been incurred and, on the other hand, a system which is defective in identifying those circumstances. We say that because a defective system can be just as much the result of human error as a mistake made in the course of operating an effective system. It cannot simply be the case that one type of human error is acceptable in this context whereas another is not.

Instead, we think that, in the case of a defective system, one needs to identify and examine the nature and extent of the defects in the system to ascertain whether they are so egregious as to suggest that, viewed in objective terms, the employer really did not care whether the payments in question were made only in circumstances where mileage or expenses were actually incurred. One such case was the example provided by Mr Vallat at the hearing – an employer who does not ask the relevant employees whether the relevant mileage or expenses were actually incurred before making payments to the employees.

In contrast, an employer might create a system which is generally effective in achieving the employer’s purpose of ensuring that payments are made only in circumstances where mileage or expenses have actually been incurred but, as a result of human error, that system might not be perfect and might give rise to some circumstances where that is not the case. To say that all payments made under such a system are round sum allowances seems to us to be wrong. Viewed objectively, the fact that the system was generally effective in ensuring that payments were made only in circumstances where mileage or expenses were actually incurred evidences the intention to achieve that goal even if that was not always the case because of a human error in creating the system. Paraphrasing the approach outlined by Etherton LJ in Cheshire at paragraphs [44] to [59] and the FTT in NWM Solutions Limited v The Commissioners for His Majesty’s Revenue and Customs [2023] UKFTT 364 (TC) (“NWM”), at paragraph [54(2)], as long as a system evidences a genuine endeavour to produce an equivalence between the payments made under the system and the expenses to which they purport to relate, it does not matter that the system occasionally fails to give rise to that equivalence.

In summary, we consider that a defective system can in some cases negate a stated intention to ensure that payments were made only in circumstances where mileage or expenses were actually incurred but that that will not be the case for all defective systems. Exactly where the dividing line is to be drawn is ultimately a matter of subjective judgment looking at all of the facts in the round.

Applying the above principles in the present case, we agree with Mr Vallat that the defects in the system for determining the circumstances in which subsistence payments were made in this case were so egregious that they should properly be regarded as discrediting the stated intention that such payments would be made only in the appropriate circumstances. In particular, the fact that the page of the registration form which indicated whether or not the relevant participant expected to incur subsistence expenses was not sent to head office, so that it was simply assumed in operating the system that every participant would be entitled to subsistence payments meant that, in our view, the system in relation to subsistence payments did not differ meaningfully from the example given by Mr Vallat and described in paragraph 113 above.

In effect, even before taking into account all of the other defects in the system pertaining to subsistence entitlements which we have outlined in paragraphs 71(9) and 71(11) above, the system in relation to the determination of the subsistence payments was so fundamentally broken that it is hard to see how it evidenced an intention to confine the payments in respect of subsistence to those circumstances in which subsistence expenses had actually been incurred. The equivalence to which reference was made in Cheshire was simply not present.

In reaching the above conclusion, we have taken into account the points made by Mr Stone in paragraph 116 to 118 above and weighed them in the balance. For the reasons set out in paragraph 71(9) above, we do not accept the proposition referred to by Mr Stone in paragraph 117 above to the effect that a participant who did not check the subsistence box on his or her ERF had still incurred subsistence expenses and had simply made an error in completing his or her ERF. As for the other points described in those paragraphs, we think that they are outweighed by the matters described in paragraphs 128 and 129 above.

Given the analysis set out above, we agree with Mr Vallat that the subsistence payments in this case were round sum allowances.

In saying that, we recognise that it is perfectly possible that a significant percentage of the subsistence payments may well have been made in circumstances where subsistence expenses had actually been incurred. In our view, that is irrelevant. That felicitous correlation does not alter the fact that, when the subsistence payments were made, TBC did not have the requisite intention to create that equivalence because it could not know which of the recipients were entitled to the payments for the simple reason that it had ignored the answer to that question in the registration form.

It is much less clear to us that the same conclusion should be drawn in relation to the mileage and public transport payments under the BSS.

We agree with Mr Vallat that there were defects in the system in relation to calculating both types of payment.

However, at least in the case of the public transport payments, those defects were largely computational. In other words, the relevant payments were made a flat daily rate and without regard to the public transport expenses that were actually incurred. Whilst that is a matter to be considered at the stage when Issue Three and Issue Four fall to be addressed, we do not see how it can be said to discredit the stated intention to make such payments only in circumstances where public transport expenses were actually incurred. As such, we agree with Mr Stone that the public transport payments were intended to be made only in circumstances where public transport expenses had actually been incurred and were not round sum allowances.

The position in relation to the mileage payments is more nuanced. As we have outlined in paragraph 71(7) above, the system did not identify when a participant spent the night away from home while on assignment, travelled to and from work indirectly or travelled to and from work from or to an address other than his or her home address. In addition, it did not deal properly with cases where there was a mixed mode of transport or a change in the usual mode of transport on an ad hoc basis. In addition, as we have outlined in paragraph 71(11) above, there were also defects in the audit process ranging from the poor response rate, the lack of sanctions for failure to comply with the audit process and the failure to make retrospective adjustments to entitlements by reference to what had been reported on the ERF. As such, there will inevitably have been cases where a mileage payment was made in circumstances where the mileage in question had not actually been incurred. We would not wish to make light of these defects. As will be seen when we come to address Issue Three, they make it impossible on any logical basis to conclude that a specified proportion of the mileage payments were made in circumstances where mileage was actually incurred.

However, that does not necessarily compel the conclusion that the payments in question were round sum allowances. The question which we need to address is whether those defects were so egregious that, when considered in the round as part of the evidence as a whole, they demonstrated an absence of any genuine intention on the part of TBC to confine the mileage payments to circumstances where mileage was actually incurred.

In our view, they do not. Looked at as a whole, the system by reference to which the mileage payments were made was designed to ensure that those payments were made only in the appropriate circumstances. That was why the registration form completed by each participant required the participant to designate his or her mode of transport and his or her home address and why the payments were made only in respect of days on which the participant was reported to have worked by the client on the timesheet. As we have summarised in paragraph 136 above, there were defects in the system as so designed but those defects were of a different magnitude to the defects in the system relating to subsistence payments. There was nothing akin to the failure on the part of the branches to send to head office the page which recorded the participant’s answer to the subsistence question. So, although the system in relation to mileage payments was not perfect, it was clearly intended to give rise to mileage payments only in circumstances where the mileage had actually been incurred and, as such, we have concluded that it would be inappropriate to conclude that the defects in the system should render all mileage payments made pursuant to that system round sum allowances.

The conclusions set out in paragraphs 135 to 138 above mean that, in our view, unlike the subsistence payments, we agree with Mr Stone that the mileage and public transport payments were not round sum allowances. Of course, those of such payments that were made in circumstances where the relevant mileage or expenses were not actually incurred need to be identified and addressed at the stage of determining which payments were capable of falling within the exemption (in the case of mileage) or were potentially capable of falling within the dispensation (in the case of public transport expenses) and we will deal with that question when we address Issue Three. But to say that the very existence of those cases (and the systemic failures which led to them) mean that all mileage and public transport payments were round sum allowances seems to us to be giving insufficient weight to the parts of the system which clearly manifested TBC’s intention in setting up the system to limit such payments to the appropriate circumstances.

For the reasons set out above, we have concluded that:

It was common ground that, even if the payments under the scheme were not round sum allowances:

Mr Vallat said that, since the circumstances in question arose as a result of defects in the system, as opposed to isolated human error, they could not be dismissed as de minimis without TBC’s identifying the specific payments which had been made in the relevant circumstances. In other words, TBC could not simply allege that, on the balance of probabilities, a significant percentage of the payments made under the scheme were likely to relate to mileage or expenses that were actually incurred because TBC had not demonstrated which of the payments had been affected by the errors in the system. The onus was on TBC to show, in relation to each payment, that that particular payment related to mileage or expenses that had actually been incurred.

In response, Mr Nawbatt and Mr Stone invited us to find that all of the mileage and public transport payments (apart from a de minimis number of payments which could be disregarded) related to mileage and public transport expenses that had actually been incurred because:

Mr Nawbatt and Mr Stone then invited us to find that 75% of the subsistence payments related to subsistence expenses that had actually been incurred because:

We start our analysis by considering the mileage and public transport payments, as we have concluded in addressing Issue Two that they were not round sum allowances and therefore the next stage in the process is to determine which of such payments related to mileage or public transport expenses that were actually incurred.

We agree with Mr Nawbatt and Mr Stone that, for the reasons set out in paragraph 143 above, a significant proportion of the mileage and public transport payments were likely to have related to mileage or public transport expenses that were actually incurred. Our findings of fact in paragraph 71(7) tend to support that conclusion. However, it is one thing to reach the conclusion that, on any one day that a participant worked, subject to the limited circumstances where there was direct evidence to the contrary, the system was likely to have given rise to mileage and public transport payments of the correct amount. It is quite another to conclude that, on that basis:

We say that because the number of deficiencies in the system used by TBC to determine the mileage and public transport payments made under the scheme, as recorded in paragraphs 71(7), 71(8) and 71(11) above, meant that, on any one day that the participant worked, there was a meaningful possibility that the system failed to give rise to mileage and public transport payments of the correct amount. The first of the above conclusions would require us to overlook those deficiencies entirely whilst the second of the above conclusions would require us to reach a view on exactly what impact in percentage terms those deficiencies would have had on the ability of the system to give rise to mileage and public transport payments of the correct amount. We do not see how we are equipped to do either of these things because of the sheer scale of the deficiencies and the uncertain impact of the deficiencies on the operation of the system.

For instance:

In view of all of those uncertainties, and, in particular, the points made in paragraphs 148(2) to 148(4) above, we cannot see how it is possible for us either to conclude that the circumstances in which mileage or public transport payments did not relate to mileage or public transport expenses that were actually incurred were so rare that they can simply be disregarded as de minimis or to determine that a specified proportion of each category of such payments should be regarded as relating to mileage or public transport expenses, as the case may be, that were actually incurred. Instead, we consider that the onus is on TBC to establish that a particular mileage or public transport payment related to mileage or an expense that was actually incurred.

We recognise that, particularly given the time that has elapsed since the BSS operated and the number of mileage and public transport payments which were made under the scheme, this may well be an impossible task but we can see no other way on which this issue can be addressed based on the evidence provided to us.

The facts in this case are a long way from the facts in NWM, where claims for subsistence were made after the subsistence expenses to which the claims related had been incurred and the FTT was prepared to infer from the terms of the form on which the claims were made that the relevant subsistence expenses had actually been incurred – see NWM at paragraphs [32] to [42]. In NWM, the Respondents did not seek to impugn the veracity of the claims that had been made whereas, in this case, the Respondents have demonstrated, with reference to a plethora of evidence, that a payment in respect of mileage or public transport expenses might often have been made in circumstances where the relevant mileage or expenses were not actually incurred.

We understand that this conclusion will be a disappointment to TBC but it is an inevitable consequence of creating a system which relied on:

Turning then to the subsistence payments, although we do not need to consider them in the context of Issue Three because of our conclusion, in addressing Issue Two, that they were round sum allowances, our views are similar to those described above.

For the reasons recorded in paragraphs 71(9) to 71(11) above, and applying the same reasoning as that set out in paragraphs 146 to 149 above, we have concluded that it is not possible for us to determine that a specified proportion of the subsistence payments should be regarded as relating to subsistence expenses that were actually incurred. For instance:

In the circumstances, if we had not already held that subsistence payments under the BSS were round sum allowances, we do not see how we would be able to come up with a specified proportion of the subsistence payments which should be regarded as relating to subsistence expenses that were actually incurred. Any such determination would necessarily involve guesswork as it would be based on insufficient information and too many variables. As such, the position would be as it is in relation to mileage and public transport payments – the onus would be on TBC to establish that a particular subsistence payment related to subsistence that was actually incurred.

We therefore determine Issue Three in favour of the Respondents.

It was common ground that Issue Four related solely to payments made under the scheme to the extent that they:

Issue Four arises out of the fact that, even if a payment under the scheme was not a round sum allowance and related to subsistence or public transport expenses actually incurred, that would still have given rise to an obligation on the part of TBC to withhold and account for income tax and NICs unless the payment in question fell within the terms of the dispensation.

Mr Vallat said that the subsistence and public transport payments which had been made in this case clearly fell outside the express terms of the dispensation. That is because, when one looked at those terms, it was clear that the system and audit failures in this case were fatal to TBC’s case on this issue.

The dispensation on its face said that the only employees covered by paragraph B of the dispensation were those whose “claims [were] independently checked and authorised by another person”. That was standard language in cases of dispensations and clearly envisaged the usual process adopted in such cases whereby, first, the relevant expense was incurred and that was then followed by a claim which was checked and authorised.

Mr Vallat did not say that, in the present case, that language needed to be construed literally, which is to say in the form set out in the dispensation itself. Instead, he accepted that the relevant language needed to be construed in the light of the correspondence which took place between Mr Nolan and Officer McDonald in the period preceding the issue of the dispensation. As such, he agreed that there was no need for the system to have required there to be claims made by the participants only after incurring the relevant expenses and for those claims then to have been independently checked and authorised before payment. Instead, a system which involved a declaration on registration followed by notification in the event that circumstances changed and comprehensive auditing with retrospective adjustments to payments wrongly made could fall within the language of the dispensation as so amended. However, it was clear that that was not what had occurred in this case.

In response, Mr Nawbatt agreed that language used in the dispensation to the effect that claims had to be independently checked and authorised by another person needed to be read in the context of the correspondence which preceded the issue of the dispensation. However, he submitted that it was apparent from that correspondence that the Respondents had clearly accepted that the system of declaration at the registration stage, followed by a retrospective notification by the participant in the event of a change in facts, and payment based that information coupled with the timesheets produced by the clients, complied with the terms of the dispensation.

Mr Nawbatt added that the Respondents’ position on this question amounted to an attempt to disapply the dispensation by reference to a failure to meet extraneous conditions relating to compliance. This question had been addressed by the FTT already in NWM. In NWM, the Respondents had issued a dispensation to the employer which was expressed to be subject to a number of “qualifying conditions”. The FTT concluded that the employer had in fact met the “qualifying conditions” and that it was therefore unnecessary for it to decide whether the “qualifying conditions” had been validly incorporated within the dispensation. However, at paragraphs [69] to [79] of its decision, it noted that:

In reply, Mr Vallat said that the point which had been at issue in NWM was different from the point which was at issue in this case. The Respondents’ position in this case was simply that, because of the way that paragraph B of the dispensation was worded and because of the manner in which that language was required to be construed in the light of the correspondence preceding the issue of the dispensation, the payments in question fell outside the express terms of the dispensation. The Respondents were not alleging that the dispensation contained extraneous qualifying conditions which TBC had failed to meet.

He added that, in any event, the FTT’s decision on the qualifying conditions point in NWM was obiter, had been reached without the benefit of hearing argument and was wrongly decided as it was contrary to obiter comments which had been made in relation to the dispensation regime by the FTT in Mainpay Limited v The Commissioners for His Majesty’s Revenue and Customs [2023] UKFTT 16 (TC) (“Mainpay FTT”) at paragraphs [183] to [189] and approved by the Upper Tribunal (the “UT”) in Mainpay Limited v The Commissioners for His Majesty’s Revenue and Customs [2024] UKUT 00233 (TCC) (“Mainpay UT”) at paragraph [113]. In its comments, the FTT had noted that:

Mr Nawbatt pointed out that, in relation to Mainpay FTT and Mainpay UT, Mr Vallat was seeking to rely on obiter comments made by the UT in respect of obiter comments made by the FTT. The decisions in question did not relate to circumstances where a dispensation had been given. In contrast, NWM related to a case where a dispensation had been given and so the issue of whether or not a dispensation could include qualifying conditions was squarely before the tribunal. The Respondents had not engaged with the conclusion reached in NWM or with the fact that, in NWM, the FTT had noted that the Respondents’ remedy in a case where extraneous conditions were not satisfied was to revoke the dispensation, if necessary retrospectively. In addition, the Respondents had not appealed against the decision in NWM. Moreover, in this case, the dispensation had been referred to the dispensation specialists within the Respondents and they had declined to revoke it. There was therefore no reason for us to depart from the decision in NWM.

Mr Vallat pointed out that the conclusion in NWM to the effect that the Respondents were not empowered to include conditions in a dispensation were themselves obiter and had been reached without the benefit of argument on the subject, as both parties had assumed that the Respondents were so empowered and the FTT had in any event concluded that the taxpayer in NWM had satisfied the conditions. He said that the obiter comments of the UT in Mainpay UT trumped the obiter comments of the FTT in NWM.

He went on to say that that the public transport payments of £3.20 per day which were made under the scheme fell outside the terms of the dispensation for a further reason – namely that the dispensation referred to the reimbursement of actual expenditure and not the payment of a fixed amount no matter what the actual expenditure had been. That was the case even in those circumstances where the expenditure actually incurred on the relevant day had been at least £3.20. On this point, Mr Vallat accepted that, if the dispensation had been worded so as to reimburse the participant for actual expenditure up to a cap of £3.20 per day, then a payment of £3.20 per day in circumstances where the actual expenditure was at least that amount would have satisfied the relevant language but that was not how the dispensation in this case had been worded.

Mr Vallat added that, by parity of reasoning, the decisions in Mainpay FTT and Mainpay UT were also indicative of the fact that it is not open to an employer to apply its own benchmark scale rates in circumstances where the terms of the dispensation expressly refer to actual expenses. In that case, the two courts had rejected the employer’s argument to the effect that, as long as the benchmark scale rate which it had applied was intended to provide a genuine reimbursement to its employees of actual expenses they had incurred, the employee should be entitled to a deduction for an amount equal to the amount so paid.

In response, Mr Stone pointed out that the test posed by Section 70 of the ITEPA was whether the payments in question were in respect of public transport expenses and the dispensation referred to expenses actually incurred. It followed that, in a case where a participant had actually incurred public transport expenses on the relevant day which were at least £3.20, the £3.20 per day payment was in respect of expenses actually incurred and fell within the terms of the dispensation. It was only in a case where the public transport expenses actually incurred on the relevant day were less than £3.20 that the payment fell outside the terms of the dispensation.

The conclusion we have reached in relation to Issue Two to the effect that the subsistence payments under the BSS were round sum allowances means that, strictly speaking, it is not necessary for us to deal with the subsistence payments in the context of Issue Four. However, we will do so because, with the exception of paragraph 175 below, which is specific to the public transport payments only, the points made in this section of our decision are pertinent to both categories of payment.

We agree with Mr Vallat that, even if payments made under the scheme were not round sum allowances and related to subsistence or public transport expenses that were actually incurred, those payments did not fall within the terms of the dispensation.

This is because those payments did not fall within the language which was used in paragraph B of the dispensation, as that language was required to be construed in the light of the correspondence between Mr Nolan and Officer McDonald leading up to the issue of the dispensation. Paragraph B of the dispensation said that the employees covered by the dispensation were employees “whose claims are independently checked and authorised by another person”. Clearly that language on its face envisaged a situation where claims were made after the day on which the relevant expense had been incurred and then subsequently subjected to check and authorisation and, equally clearly, that was not the case here. However, that language needs to be construed in the light of what was said by Mr Nolan to Officer McDonald in the correspondence leading up to the issue of the dispensation. It cannot simply be ignored on the basis that it is inconsistent with the structure described by Mr Nolan.

In particular, in his letters of 23 February 2011, 15 March 2011, 6 April 2011 and 20 April 2011, Mr Nolan sought to allay Officer McDonald’s concerns about the unusual structure of the arrangement by assuring Officer McDonald that the arrangements would be such as to ensure that payments would be made under the scheme only in appropriate cases. For instance, in his letter of 20 April 2011, Mr Nolan assured Officer McDonald that “rigorous procedures will be adopted to ensure that employees have incurred expenses”. It was on the basis of those assurances that Mr Nolan was able to persuade Officer McDonald to issue the dispensation. However, it is apparent from the facts set out above that that is not how matters transpired in relation to the scheme and, for that reason, we do not see how participants who received subsistence or public transport payments can properly be said to fall within paragraph B of the dispensation as that paragraph is required to be construed in the light of the correspondence.

Leaving aside for the moment the general point made above, as regards the public transport payments, there is the additional point that the terms of the dispensation referred to the actual expenses incurred by employees on public transport and not the benchmark scale payment of £3.20 per day devised by TBC. We would not go so far as Mr Vallat in saying that, as such, the payments made by TBC to a participant who had actually incurred public transport expenses could never fall within the dispensation regardless of the quantum of those expenses. We believe that a payment of £3.20 per day made to a participant who had actually incurred public transport expenses on the day in question of at least £3.20 would be capable of falling within the dispensation. To reach the opposite conclusion would in our view involve an excessively literal construction of the language used in the dispensation. However, given the conclusion we have reached in paragraphs 171 to 174 above based on the description of the employees who fell within the dispensation, the point is academic.

The conclusion set out above is specific to the terms on which the dispensation in this case was issued and the correspondence leading up to that issue. It means that it is unnecessary for us to express a view on the general question of whether or not it is open to the Respondents to include non–statutory qualifying conditions within the terms of a dispensation and then to allege that the dispensation has never applied because one or more of those conditions has not been satisfied. However, we can see no reason to differ on that question from the conclusion reached by the FTT in NWM at paragraphs [69] to [79]. It seems to us that, for the reasons given in those paragraphs, it is not open to the Respondents to grant a dispensation which is conditional on the satisfaction of qualifying conditions that have no basis in the legislation and then subsequently to disavow the dispensation because one or more of those qualifying conditions have not been satisfied.

However, that is not to say that the Respondents can have no redress in a case where, instead of limiting the categories of employees falling within the ambit of the dispensation by reference to the administrative requirements, as they have done in this case, they have instead chosen to refer to those administrative requirements as qualifying conditions and then the employer to which they have given the dispensation fails to meet one or more of those qualifying conditions.

That is because:

We believe that it is against the background of that second point that the comments which were made by the FTT in Mainpay FTT in paragraphs [183] to [189] and approved by the UT in Mainpay UT at paragraph [113] should be construed. In our view, the relevant tribunals were not saying that it was open to the Respondents to disavow a dispensation on the basis that there has been a breach of one or more qualifying conditions. Instead, they were simply making the point that the Respondents can always revoke a dispensation prospectively or retrospectively if they have granted it on condition that the employer adopts procedures for ensuring that payments alleged to fall within the scope of the dispensation actually do so and then reach the view that those procedures have not been adopted.

For the reasons set out above, we have concluded that, regardless of whether the subsistence payments or the public transport payments were round sum allowances or were related to expenses that were actually incurred, they do not fall within the terms of the dispensation and therefore, subject to our conclusions in relation to Issue Five and Issue Six, those payments gave rise to an obligation on the part of TBC to withhold and account for income tax and NICs.

We therefore determine Issue Four in favour of the Respondents.

The arguments at the hearing focused on the first limb of the condition in Regulation 72(3) of the PAYE Regulations – namely, whether or not TBC had taken reasonable care to comply with the PAYE Regulations – and not the second limb of that condition pertaining to whether or not the errors made by TBC had been made in good faith.

As regards that first limb, the parties disagreed on two things, as follows:

In relation to the first question, Mr Nawbatt said that we should follow the decision of the FTT in Sci–temps v The Commissioners for Her Majesty’s Revenue and Customs [2020] UKFTT 314 (TC) (“Sci–temps”) at paragraph [78] to the effect that the question of reasonable care was essentially the same as whether there was a reasonable excuse and that therefore the guidance in relation to reasonable excuse which had been given by the UT in Perrin v The Commissioners for Her Majesty’s Revenue and Customs [2018] UKUT 156 should be followed. As such, we should consider whether, taking into account the experience and other relevant attributes of Mr Sweeney, as the controlling mind of TBC in this context, and the situation in which Mr Sweeney found himself at the relevant time, Mr Sweeney had a reasonable excuse for the actions of TBC in relation to the BSS.

In response, Mr Vallat submitted that the view set out in Sci–temps was obiter and wrong. He accepted that a person who had taken reasonable care would also have a reasonable excuse but it did not follow that a person who had a reasonable excuse would always, of necessity, have taken reasonable care. The question at issue in a reasonable excuse case was whether there was a good reason to relieve the taxpayer of the burden of the tax that was in dispute. As such, it involved an exercise in balancing the competing claims of the taxpayer and the Respondents. In contrast, the question at issue in a reasonable care case was whether the taxpayer had acted with reasonable care taking into account the circumstances. In this case, TBC was attempting to shift a tax liability from itself to the participants in circumstances where that tax liability had arisen as a result of TBC’s actions and so the relevant question was whether TBC had exercised sufficient care in order to do that.

In relation to the second question, Mr Nawbatt said that we should bear in mind that the BSS was not an aggressive tax avoidance scheme. Instead, it was a lawful salary sacrifice arrangement of a kind which was familiar to the Respondents, as could be seen in the Temp Condoc, the NMW Condoc and the Respondents Employment Income Manual at paragraph EIM42752 – see paragraphs 40 to 48 above. It was apparent from the evidence that Mr Sweeney had sought to adopt the BSS for TBC simply in order to enable TBC to keep pace with its competitors. In so doing, Mr Sweeney was entitled to rely on Aspire as the experts in the area of salary sacrifice and travel expenses – see Hanson v The Commissioners for Her Majesty’s Revenue and Customs [2012] UKFTT 314 at paragraph [24] and Mainpay UT at paragraph [141].

Moreover, Mr Sweeney was entitled to take comfort from the fact that, in the course of the correspondence between Mr Nolan and Officer McDonald which preceded the issue of the dispensation, the Respondents had been fully apprised of how the BSS was to operate. As a result of that correspondence, Mr Sweeney was entitled to assume that the system of declaration at the registration stage, followed by a retrospective notification by the participant in the event of a change in facts, and payment based that information coupled with the timesheets produced by the clients, complied with the terms of the dispensation.

In addition, Mr Sweeney had exercised reasonable care in ensuring that a thorough and detailed training programme had been implemented within TBC and had commissioned BestEx to carry out audits in relation to how the scheme was being implemented.

Mr Vallat submitted that TBC had failed to show reasonable care in 2 respects as follows:

We do not propose to spend any time addressing the first question described above – the question of whether there might be circumstances in which a taxpayer who has a reasonable excuse might nevertheless not have taken reasonable care. It seems to us that the question is somewhat academic in the present context because, even if we adopt Mr Nawbatt’s approach of equating the 2 tests, it is hard to see how, in introducing and operating the BSS, Mr Sweeney, as the controlling mind of TBC in this context, can be said to have had a reasonable excuse for the shortfall in income tax withheld under the PAYE Regulations or to have taken reasonable care to comply with the PAYE Regulations.

Turning to the latter question, which is the one which we are required to address in the Regulation 72 Appeal, we agree with Mr Nawbatt that Mr Sweeney did take reasonable care to comply with the PAYE Regulations insofar as he:

However, in our view, Mr Sweeney did not take reasonable care to comply with the PAYE Regulations when he:

Whilst the lack of reasonable care was more apparent in the case of the subsistence payments and the public transport payments than in the case of the mileage payments, we have concluded that the lack of reasonable care extended to all of the payments which are the subject of the appeal.

It is therefore unnecessary for us to address in this decision the question which we put to both parties at the hearing as to whether or not we would have the power to direct the Respondents to make a Section 72 Direction in relation to one category of payments but not others. However, we note that both parties were of the view that we do not have the power to distinguish between categories of payments in that way, albeit that we do have the power to direct the Respondents to make a Section 72 Direction in relation to some participants but not others and in relation to some months but not others.

In view of the above conclusion, we consider that TBC fails the reasonable care limb of the condition in Regulation 72(3) of the PAYE Regulations in relation the payments made under the scheme and we decline to direct the Respondents to make a Regulation 72 Direction in relation to any of the relevant tax years.

As such, we determine Issue Five in favour of the Respondents and the Section 72A Appeal fails.

It was common ground that:

Mr Vallat submitted that, as laid down in Pegasus at paragraph [21], best judgment required an honest and genuine attempt by the relevant officer of the Respondents to determine the tax due. Whilst a determination of an unreasonable amount might raise a question as to whether the relevant officer had made an honest and genuine attempt to calculate the right amount, that question could be answered in the affirmative as long as the attempt was honest and genuine, even if the amount in question had been reached as a result of a mistake or as a result of incompetence.

In response, Mr Stone said that the test laid down by Pegasus was not wholly subjective. Even an honest and genuine attempt to determine the tax due could fail the best judgment test if the errors made by the officer were such that no inspector seeking to exercise best judgment would have reached the same view. In a case where there was no explanation for the determination, the proper inference might be that the determination was arbitrary and therefore failed that test. In saying that, he relied on Pegasus at paragraphs [21], [22] and [77] to [79] and Rahman v Customs and Excise Commissioners (No 2) [2003] STC 150 at paragraph [32].

Mr Stone went on to say that an essential part of meeting the burden of proof on best judgment was for the Respondents to establish how the 2013 Determination had actually been calculated. That was a necessary preliminary stage before considering whether the method used was reasonable. In respect of that preliminary stage:

In response, Mr Vallat said that:

Mr Stone accepted that, in mathematical terms, the figure reached by Officer Dalton in her third witness statement aligned with the figure given by Officer Agg in the review conclusion letter. However, Officer Agg had not set out the methodology by which he had reached that figure and clearly the methodology set out by Officer Dalton in her third witness statement was different from the methodology set out by Officer Dalton in her first witness statement.

He went on to say that, even if we were to accept Officer Dalton’s most recent explanation of her method of calculation – the one given in her third witness statement – that method was unreasonable because:

In response, Mr Vallat said that the method described by Officer Dalton in her first and third witness statements was a reasonable method to apply and was, in any event, at the very least an honest and genuine attempt to determine the income tax due. As regards the criticisms made by Mr Stone, Mr Vallat said that:

We should preface this final part of our decision by saying that it is clear from the decision in Pegasus that:

In our view, it follows from the above that, in the context of a decision in principle such as this one, where the question of quantum has been deferred to a later stage in the proceedings, we should not reach a final conclusion on the question of best judgment unless this is one of the very exceptional cases mentioned in Pegasus at paragraphs [38(i)] and [38(iv)] – in other words, where dealing with the best judgment challenge as a preliminary issue and before considering quantum will save time. In our view, the exceptional cases where such an approach would be justified are likely to be those where “the defect [in the assessment] is so serious or fundamental that justice requires the whole assessment to be set aside” and the two–stage approach of dealing with best judgment before considering quantum might obviate the need to address quantum and thus save time – see Pegasus at paragraphs [18], [19] and [29].

Notwithstanding the considerable shortcomings and inconsistencies in the various explanations for the 2013 Determination which have been provided by Officer Dalton and which are outlined in our summary of her evidence in paragraphs 61 to 70 above, we consider that this is not such an exceptional case. We say that because, despite those deficiencies, we think that there is enough in Officer Dalton’s evidence to suggest that the 2013 Determination was not issued arbitrarily but instead reflected an honest and genuine attempt on her part to calculate the appropriate income tax liability in respect of the BSS for the relevant tax year. As such, we believe that this is not a case where the best judgment question should be determined as a preliminary issue in advance of considering quantum.

Indeed, we would go further than that and add that, although we have declined to reach a final conclusion on this question prior to any consideration of quantum, our present view is that the evidence in this case points firmly in the direction of concluding that the 2013 Determination was issued to best judgment and that, therefore, it would be surprising if we were ultimately to reach the contrary conclusion when the question of quantum falls to be considered.

That view is based on our observation that:

In addition, we agree with Mr Vallat that:

Having said that, we do not think that Officer Dalton emerges with great credit from the process.

At the hearing, Mr Vallat made a valiant attempt to describe the explanation which Officer Dalton provided in her email to Mr Wilson of 22 March 2017 as merely “incomplete” but the reality is that the process it described – one of calculating the income tax liabilities attributable to both the BTR and the BSS together using the same method – was wholly inconsistent with the process set out in Officer Dalton’s third witness statement (and, for that matter, Officer Dalton’s first witness statement).

Similarly, we do not agree with Mr Vallat’s characterisation of Officer Dalton’s first witness statement as effectively describing the same method as the one described in Officer Dalton’s third witness statement, albeit with some minor errors. The content of Officer Dalton’s first witness statement was shockingly poor for a document given under oath which was required to inform the FTT of the facts which led to the 2013 Determination. We have set out in paragraphs 67 and 70(3) above the many errors which it contained. Had Mr Sweeney not pointed out those errors in his third witness statement and thereby allowed Officer Dalton the opportunity to provide a more cogent explanation for the 2013 Determination in her third witness statement, the tentative conclusion which we describe above might well have been very different.

In conclusion on Issue Six, we have decided to defer to the stage of the proceedings at which quantum falls to be addressed our final conclusion as to whether the 2013 Determination was issued to best judgment but observe at this stage that, on the basis of the evidence, we would be surprised if we were ultimately to conclude that the 2013 Determination was not issued to best judgment.

We would summarise the conclusions set out above as follows:

It follows from the above that the appeals fail except to the extent that that they relate to those mileage payments which TBC is able to show relate to mileage that was actually incurred and therefore fall within the exemptions in Section 229 of the ITEPA and Regulation 22A of the SS(C)R 2001).

This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First–tier Tribunal) (Tax Chamber) Rules 2009 (the “Tribunal Rules”). The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First–tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.