Adecco UK Ltd and Others v Revenue and Customs Commissioners
| Jurisdiction | UK Non-devolved |
| Judgment Date | 17 March 2017 |
| Neutral Citation | [2017] UKUT 113 (TCC) |
| Date | 17 March 2017 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
The Hon Mrs Justice Proudman DBE, Judge Greg Sinfield
Valentina Sloane, counsel, instructed by Deloitte LLP, for the appeared appellants
Eleni Mitrophanous and Laura Prince, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Value added tax – Tripartite situation – Whether employment business providing self-employed temporary workers to clients supplies staff for total consideration paid by client or only introductory services for commission retained by employment business – Whether temporary workers supply services to employment business or to clients – Airtours Holidays Transport Ltd v R & C Commrs [2016] BVC 17 applied – Whether economic reality inconsistent with contractual position – Appeal dismissed.
Adecco is the representative member of a Value added tax (VAT) Group including various companies involved in the employment recruitment industry. The First-tier Tribunal (FTT) had rejected an appeal against a decision of HM Revenue & 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 in that VAT is due only on the commission paid for introductory services.
Adecco recruits staff on behalf of clients along three lines – see para. 7 of the decision.
Contract workers who are self-employed and who contract with clients directly charging only an introductory fee.
Employed temporary workers who agree not to sign up with any other bureau and to accept any assignment are employed by Adecco and assigned to clients and VAT is charged on the whole fee.
Non-employed temps (temps) are the subject of this appeal. The Conduct of Employment Agencies and Employment Businesses Regulations 2003 (SI 2003/3319), reg. 15 required employment businesses to have a contract with temps, which required them to pay the temps whether or not a client paid for their services. They are not employed, but for PAYE/NIC and working time regulations Adecco is classed as employer.
The FTT in Adecco disagreed with the conclusion in Reed and the Upper Tribunal (UT) decided not to review Reed, but to look at the facts and circumstances as set out before it. The UT summarised the parties positions as follows. The appellant claims it introduces temps to a client for a commission and does not consume their services and supply them on to clients. HMRC's argument is that temps supply their services to Adecco which then supplies them on to clients.
The UT approached the matter in the light of Airtours Holidays Transport Ltd v R & C Commrs VAT[2016] BVC 17, a decision which was not available when the FTT sat. Airtours set out a principle that in determining the nature of a supply there is a two-way process (para. 43) firstly establishing the contractual position and secondly whether this reflects the economic analysis of a transaction. The FTT had taken the correct approach in establishing the contractual position as the starting point to determine to whom and what supply is being made – see para. 44 of the decision.
Adecco contracted with the temp who agreed to perform each assignment under the direction, control and supervision of the client. The temp had no contract with the client. In return, Adecco agreed under the contract to pay the temp for work undertaken. The UT saw this as a legal relationship, where both sides agree to do something for the other. The UT rejected the appellant's argument that Adecco did not receive and use or consume the services supplied by the temps, which in turn meant that services could not be supplied on to clients by Adecco. The UT referred to C & E Commrs v Reed Personnel Services Ltd VAT[1995] BVC 222 (see para. 47), where Reed provided temporary nurses to hospitals. Laws J accepted that the contracts referred to a supply of nurses and not nursing services. The UT took this view in the current case that Adecco supplied temporary workers in the terms of the contract. Laws J also made comment in Reed Personnel Services as to the nature of a supply that the concept of supply is not identical with that of the contractual obligation and contracts do not necessarily determine the nature or what supplies are being made. The nature of a VAT supply should is to be ascertained from the whole facts of the case as Lord Neuberger set out in Airtours.
The economic and commercial reality was that Adecco agreed with clients to supply temps who would work for them. Adecco would pay the temps an agreed hourly rate and clients would pay Adecco a fee based on this hourly rate plus a commission. This would produce the same result as already existed with regard to employed temps – see para. 50.
HMRC never appealed Reed in 2011, instead HMRC Brief 32/11 (24 August 2011) was issued reiterating the view which it argued in Adecco and now has agreement from a higher court. Recruitment agencies will need to review their contracts and arrangements with clients in the light of this decision, although it remains to be seen whether there will be an appeal given the sums at stake and the likely impact on clients in exempt industries such as health, charitable, education and finance.
[1] The Appellants (referred to collectively as Adecco) are all employment businesses that provided temporary staff to clients in return for payment. In relation to certain temporary workers who were not considered, for purposes relevant to this appeal, to be employees of Adecco (non-employed temps), the clients paid Adecco an amount representing the payments that Adecco was contractually obliged to pay the workers for the work they had done for the clients and a commission for Adecco's services. Between 1 April 2007 and 31 December 2008, Adecco accounted for VAT on the total amount paid by clients, ie the non-employed temps' remuneration and Adecco's commission.
[2] On 24 March 2011, the First-tier Tribunal (Tax Chamber) (FTT) released its decision in the case of Reed Employment Ltd TAX[2011] TC 01069 (Reed), which concerned the VAT treatment of supplies by an employment bureau in relation to the services of non-employed temps. The FTT in Reed concluded that the employment bureau was making supplies of introductory services to clients in respect of the placement of non-employed temps. The value of the introductory services was the commission charged to clients for the introduction of the temps and the employment bureau was only required to charge and account for VAT on its commission and not on the non-employed temps' remuneration. The Respondents (HMRC) did not appeal against the decision in Reed.
[3] Following Reed, Adecco made several claims for repayment of the VAT which it had charged and accounted for in respect of payments representing the non-employed temps' remuneration during the period from 1 April 2007 to 31 December 2008. In a decision dated 14 March 2013, HMRC rejected the claims. One of the reasons given by HMRC for rejecting the claim was that, in HMRC's view, Adecco did not merely supply a service of introducing the non-employed temps to the clients but also supplied the non-employed temps' services. On that analysis, Adecco was liable to account for VAT on the full amount paid by the clients.
[4] Adecco appealed to the FTT which decided to deal with the question of liability – which was really a question about the nature of the supply by Adecco – as a preliminary issue. In a decision released on 27 November 2015 with neutral citation [2015] TC 04743 (the Decision), the FTT decided that Adecco was liable to account for VAT on the full amount paid by the clients and dismissed Adecco's appeal. The FTT found that, under the contract between them, the client was obliged to pay Adecco for the work done by the non-employed temp as well as for Adecco's services and Adecco was obliged, under its contract with the temp, to pay the temp for the work. There was no contract between the non-employed temp and the client, which had no obligation to pay the temp. The FTT concluded that the temp was obliged, under the contract with Adecco, to perform work for the client. Adecco was not supplying clients with introductory services but the work of the non-employed temps. As the clients were the consumers and had agreed to pay Adecco the full fee (both wages and commission), there was no question that the contractual flow was inconsistent with economic reality. The FTT considered that its conclusion was not affected by the fact that Adecco could not and did not tell the non-employed temp how to carry out the work for the client and might not know about matters such as holiday or sick leave or even when the assignment ended.
[5] Adecco now appeals, with the permission of the FTT, against the Decision. Save as otherwise indicated, paragraph references in square brackets in this decision are to the paragraphs in the Decision.
[6] The background to and facts of this appeal are not disputed and are fully set out in the Decision. The relevant facts for the purposes of this appeal can be summarised as follows.
[7] Adecco provided workers to its clients using one of three different arrangements:
1) Contract workers are self-employed workers introduced to a client by Adecco. If the client accepts the worker, the client enters into a contract with the worker to provide the work required. Contract workers are not Adecco's employees and are not paid by Adecco. Adecco typically charges the client a one-off fee, normally calculated by reference to the worker's rate of pay and the length of the assignment. The parties agree that contract workers provide their services to the client, Adecco...
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