Adecco UK Ltd and Others
| Jurisdiction | UK Non-devolved |
| Judgment Date | 27 November 2015 |
| Neutral Citation | [2015] UKFTT 600 (TC) |
| Date | 27 November 2015 |
| Court | First-tier Tribunal (Tax Chamber) |
Judge Barbara Mosedale
Mr S Grodzinski QC and Ms V Sloane, Counsel, instructed by Deloittes LLP appeared for the Appellant
Ms E Mitrophanous, Counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the Respondents
Value added tax – Tripartite arrangement – Temps carrying out work for clients of employment business – Whether decision in Reed Employment Ltd [2011] TC 01069 should be followed – No – C & E Commrs v Redrow Group plc [1999] BVC 96, R & C Commrs v Loyalty Management UK Ltd and Baxi Group Ltd (Joined Cases C-53/09 and C-55/09) [2011] BVC 1, R & C Commrs v Aimia Coalition Loyalty UK Ltd (formerly known as Loyalty Management UK Ltd) [2013] BVC 67 and WHA Ltd v R & C Commrs [2013] BVC 155 applied – Whether economic reality inconsistent with contractual position – No – Appeal dismissed.
The First-tier Tribunal (FTT) dismissed the appeal by Adecco UK Ltd against HMRC's refusal of its claim for repayment of output VAT accounted for on the part of the fee received from its clients that represented the wages it paid to its temporary workers finding that the direction of supply for VAT purposes in a tripartite agreement was to be determined by following the liability to pay unless the economic reality does not match the contractual position and results in no VAT being charged on the final consumption by the consumer. In such a case, economic reality trumps and requires the supply to be seen as made to the final consumer.
The appellant companies formed a single VAT group, the representative member of which was Adecco UK Ltd (Adecco). Adecco provided recruitment services to its clients which included introducing temporary workers (temps) to undertake assignments. Adecco paid the temps' salaries under PAYE and recharged the client an amount equivalent to the wages paid plus a commission and accounted for output VAT on the full amount of the fee it received.
However, the decision of the FTT in the case of Reed Employment Ltd TAX[2011] TC 01069 found that the employment bureau appellant in that case was supplying only introductory services to its clients in return for its commission and was, therefore, not liable to account for VAT on the sums it received in respect of the gross wages of its temps. Accordingly, Adecco submitted repayment claims on the same basis which were rejected by HMRC. The matter for the FTT to determine was, therefore, what did Adecco supply and was this the services of the temps or merely the service of introducing the temps? In other words, to whom did the temps supply their work? If this was Adecco, then Adecco must have on-supplied these to its clients. If not, the temps would logically have supplied their services direct to the clients and not via Adecco.
The FTT considered that the starting point was to consider the contractual position. In this respect, the FTT found that Adecco was liable to pay the temp the agreed payment for its services and that the client had no contractual obligation with either the temp or Adecco to pay the temp for its work, the client's only obligation was to pay Adecco the agreed fee. The contractual position was, therefore, that the temp worked for payment from Adecco and Adecco provided that work to its client in return for payment by the client. There was no contract between the temp and the client.
The FTT then noted that following R & C Commrs v Newey (t/a Ocean Finance) ECASVAT(Case C-653/11) [2013] BVC 259 and R & C Commrs v Secret Hotels2 Ltd (formerly Med Hotels Ltd) VAT[2014] BVC 9, whilst the contractual terms were a factor to be taken into consideration, the contractual position did not necessarily determine the question of to whom and by whom and of what the supplies were made, it was necessary also to look at the economic and commercial reality of the transactions.
In this respect, the FTT first considered the Reed case, noting that this appeared to have been decided on the basis that: (i) there was a lack of mutuality of obligation between Reed and the temp, and (ii) there was a lack of control by Reed over the temp's work. Reed seemed to conclude that A cannot supply its work to B if what A agrees to do for B is work at C's direction. The FTT disagreed concluding that a VAT supply was doing something in return for consideration and that there was no logical reason why A agreeing with B, in return for money, to do what C tells it do could not be a VAT supply by A to B. Reed could not be followed.
The FTT then considered a number of other key cases:
•Tolsma v Inspecteur der Omzetbelasting Leeuwarden ECASVAT(Case C-16/93) [1994] BVC 117;
•C & E Commrs v Reed Personnel Services Ltd VAT[1995] BVC 222;
•Hays Personnel Services Ltd VAT[1997] BVC 4,106;
•C & E Commrs v Redrow Group plc VAT[1999] BVC 96;
•R & C Commrs v Loyalty Management UK Ltd and Baxi Group Ltd ECASECASVAT(Joined Cases C-53/09 and C-55/09) [2011] BVC 1 and R & C Commrs v Baxi Group Ltd ECASECASVAT(Joined Cases C-53/09 and C-55/09) [2011] BVC 1;
•Lane TAX[2013] TC 02909;
•R & C Commrs v Aimia Coalition Loyalty UK Ltd (formerly Loyalty Management UK Ltd) VAT[2013] BVC 67;
•WHA Ltd v R & C Commrs VAT[2013] BVC 155; and
•Airtours Holidays Transport Ltd v R & C Commrs VAT[2014] BVC 32.
For many years, Redrow had been the leading authority on identifying the recipient of a supply in a tripartite situation and had provided a simple rule, “follow the liability to pay”. On this analysis, the temps supplied Adecco with the service of agreeing to do the work the client asked it to do and Adecco supplied the client with a person who would work under the client's direction to do the work the client wanted doing. However, the ECJ in Loyalty Management was clearly and rightly concerned with the major VAT concept enshrined in the VAT Sixth Directive and later the Principal Directive that final consumption should be taxed and had identified the direction of the supply by asking “who got ownership of the goods?” rather than “who pays?”. And Baxi could be seen as an example of a case where economic reality trumped the basic “follow the liability to pay” rule.
Considering all the cases, the FTT concluded that what they showed was that a VAT supply, ordinarily at least, required a legal relationship between the supplier and recipient under which the supplier was obliged to make the supply and the recipient liable to pay for it. Nevertheless, where the economic reality of the legal relationship was such that it results in the final consumption of goods or services by a consumer in circumstances where in effect there is no VAT charge on that consumption then this normal rule is overridden because the ultimate purpose of the Principal VAT Directive is to tax final consumption.
In conclusion, in a situation where B agrees to pay A to provide goods and/or services to C, and C agrees with B to pay for the goods and/or services provided by A, then a Redrow“follow the liability to pay” analysis applies to decide to whom A's supply is made. This is because the legal relationships reflect the economic reality and the outcome is consistent with the Principal VAT directive because final consumption is taxed. In other words, A's supply is to B and B makes and on-supply to C. But where a Redrow“follow the liability to pay” analysis does not lead to tax on final consumption, because although A makes a supply to B, B does not on-supply A's services to C, then C's consumption will be untaxed and applying Baxi/Aimia/WHA, economic reality requires the supply to be seen as made to the final consumer. And the economic reality which matters for VAT purposes is the identity of the final consumer. If this is not the person with liability to pay for the thing consumed, then economic reality does not match the contractual position.
Applying this analysis to the present appeal, the FTT found that Adecco's client was the final consumer of the work undertaken by the temps, and under the contracts did have liability to pay for the work it consumed so the economic reality was consistent with the contracts. Tolsma/Redrow applied and as Adecco was entitled to be paid by its client the full fee for the temps work, Adecco was required to account for VAT on the full fee.
The appeal was dismissed.
This case usefully examines in detail the findings of a number of key VAT cases concerning supplies made under tripartite arrangements and whether supplies are made from A to B and then B to C or directly from A to C, as well as reconciling the earlier decisions which might otherwise appear to be at odds with one another. For the appellant, Adecco (a recruitment services provider), the FTT's findings mean that it was liable to account for output VAT on the full amount of the fee that it received from its clients for the supply of temporary workers, including the amounts representing the wages Adecco paid on to the temporary workers under PAYE. The FTT reached this conclusion despite the fact the FTT in the almost identical case of Reed Employment Ltd TAX[2011] TC 01069 had reached the opposite conclusion in deciding that Reed was supplying only introductory services and was, therefore, entitled to repayment of VAT accounted for on sums received from its clients in respect of the gross wages of the temporary workers. The FTT concluded it was unable to accept the conclusion in Reed and would not base its conclusion on the analysis used in that case.
[1] The companies listed as appellants are now all members of a single VAT group the representative member of which is Adecco UK Limited. They were not all VAT group members at the time to which the voluntary disclosure the subject of this appeal relates. Therefore, there is doubt whether the appellant should only be Adecco UK Ltd or should include the other group companies. I was not asked to resolve this. For the sake of...
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Adecco UK Ltd and Others v Revenue and Customs Commissioners
...Customs (HMRC) that the supply of non-employed temporary staff (temps) to clients was subject to VAT on the full amount paid by clients ([2015] TC 04743). Adecco argued that the supply was one of introductory services only and should follow the case of Reed Employment Ltd TAX[2011] TC 01069......