The Best Connection Group salary sacrifice scheme case: A cautionary tale for accountants and employment tax professionals

Justine Riccomini explores a recent First-Tier Tribunal (FTT) and how a lack of due care caused salary sacrifice schemes to go wrong.

In a FTT decision issued on 6 December 2024, the case of The Best Connection Group (TBC) Ltd v HMRC was examined. The reader finds themselves transported into the depths of a lengthy (82-page) case transcript which concerns itself with what is essentially the tax and NICs treatment of three salary sacrifice sub-schemes which had each been set up by the Appellant to facilitate travel and subsistence payments to different categories of worker.

TBC was a supplier of temporary staff and at any one time, had around 2,000 employees on the books.

Having read the detail of the case decision, it becomes clear that HMRC had carried out an in-depth examination of the three schemes in operation, and produced a significant volume of evidence as to why they considered the schemes not to have worked. Tax assessments raised by HMRC amounted to around £5.8m.

I ought to point out that the case is not yet fully concluded and there is more on it to come! It was decided that the quantum of any settlement would be decided once the decision had been released, if necessary, by further recourse to the Tax Tribunal.

What was the problem?

The three types of payment were made by TBC to employees denoted as being “participants” in the following schemes within the so-called “Best Pay Salary Sacrifice” scheme (BSS) over a period of four years ending 5 April 2013 to 5 April 2016 inclusive:

1. Payments in respect of mileage undertaken by the participants in going to and from their temporary places of work by car, motorcycle or pedal cycle; 
2. Payments in respect of expenses incurred by the participants in going to and from their temporary places of work by public transport; and 
3. Payments in respect of expenses incurred by the participants on food and drink while they were away from home in the course of their employment.

The judiciary were tasked with reviewing whether the terms of the P11D dispensation, issued by HMRC in respect of items two and three above had been exceeded or not. If this was the case, the payments should be treated as fully liable to PAYE and NICs. TBC had concluded that no PAYE or NICs were due as the mileage payments were exempt, and the public transport and subsistence expenses tallied with what HMRC had set out in a P11D dispensation some years previously.  

Paragraphs 30 and 31 of the decision set out how the case came before the FTT at all:

“30. 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: (1) the employer had taken reasonable care to comply with the PAYE Regulations, and (2) the failure to deduct the excess was due to an error made in good faith. 

31. 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.”

In other words, the Appellants were appealing to the FTT on the basis that they had taken reasonable care and acted in good faith, and that HMRC had failed to take account of this and refused to cancel out the charges raised for the PAYE and NICs not paid in error.

TBC had consulted a professional services firm (Aspire) to advise on the implementation of a salary sacrifice arrangement who in turn engaged McGrigors Solicitors to advise on the employment legislation position. TBC considered that implementing a salary sacrifice scheme would put his business on an equal competitive footing with its competitors. At any one time, there were around 1,500 to 2,000 workers participating in the scheme.

More than 18 months after the scheme was implemented, TBS engaged a company called BestEx to audit the expenses, but it appears they failed in their auditing role to a large extent to capture all the errors and omissions committed by the claimants of the expenses. In a similar way, the accountants and auditors at the time also failed to spot any inconsistencies as part of their annual audit processes (however - they were not engaged to advise on this matter). In addition, the testimony of witnesses for TBC demonstrated that managers and workers alike didn’t have any real understanding of how the scheme worked or indeed why it was important for tax purposes to get it right.
 

What approach did the judiciary take?

After a considerable fact-finding exercise, the FTT made some fact-based decisions. The concluded that:

1. Due to the complexity of the scheme, no claimant could have known they were mis-claiming, and no manager been able to fully audit the records.  
2. It would have been impossible for the individual to have received anything but an overpayment due to the way in which the scheme operated.
3. Basic elements of the scheme were not operated properly.
4. Participants in the scheme were paid using default assumptions unless they notified TBC otherwise on the day of the travel.
5. The lack of knowledge of the expenses system requirements did not mean the claimants were necessarily dishonest – they were simply unaware.
6. The expenses system did not take account of detours made for private purposes in the travel claims.
7. The public transport rate was not calculated or paid in accordance with the dispensation.
8. The subsistence was paid automatically whether the participant was entitled to claim it or not.
9. The software calculated journey times without taking into account any change in method of commute to the temporary workplace.
10. The software did not take into account unpaid breaktimes which might have influenced the participant’s entitlement to subsistence allowances on any given day.
11. The audit process was fundamentally flawed.
12. The system did not require the claimants to attach receipts.

The FTT considered that this case had to be considered on the facts to establish levels of negligence, human error and causal links.

In terms of the subsistence payments, they concluded that they could not be anything other than round sum allowances because the systems and the management of those systems was so hit and miss that no proof was available to robustly prove they were not.

In terms of the travel payments, they concluded that the public transport payments were made only when a journey was undertaken albeit a flat raid was paid. The mileage payments were different again and at Para.138 of the decision, the FTT conclude “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”. Therefore, TBC will have the assessments adjusted to a lower figure in respect of the payments of mileage which can be demonstrated to be accurate.

The FTT also concluded that the subsistence payment and public transport payments had been made outside the terms of the P11D dispensation and thus found in favour of HMRC.  

The Reg.72 basis of appeal was also quashed by the FTT who found that the Appellants had not taken reasonable care and thus, HMRC was correct to refuse an easement.

What can ICAS members learn?

The concept of travel and subsistence always seems to be a basic matter – and yet it is easy to fall into bear traps giving rise to huge assessments when due care and attention is not paid to the detail. Staff training, company and staff policies and inadequate systems all contributed to this case. The client’s eye was on the prize of achieving competitive parity, and the checks and balances fell by the wayside.