Mercy Global Consult Ltd ((in Liquidation)) v Abayomi Adegbuyi-Jackson

Hearing date: 20 September 2023

Approved Judgment

Introduction

On 9 October 2022 the First, Third, Sixth to Eleventh and Thirteenth to Fifteenth Defendants (“the Appellants”) applied: (i) for permission to amend their Defences to advance a defence (“the VAT Defence”) that the Claimant (“MGC”) made supplies that were exempt from VAT by virtue of Items 1 and/or 4 of Group 7 of Schedule 9 to the Value Added Tax Act 1994 (“ VATA”); and (ii) for an order that the VAT Defence be tried as a preliminary issue. By order dated 5 May 2023 Richards J dismissed both applications for the reasons given in his judgment dated 31 March 2023 [2023] EWHC 749 (Ch). In short, the judge held that the VAT Defence was precluded by the decision of this Court in Mainpay Ltd v Revenue and Customs Commissioners [2022] EWCA Civ 1620, [2023] 3 All ER 912. The Appellants appealed with permission granted by Newey LJ. At the conclusion of the oral argument with respect to the Appellants' challenge to the judge's decision on the application for permission to amend their Defences, the Court announced that the appeal would be dismissed for reasons to be given subsequently. My reasons for agreeing to that disposition of the appeal are as follows.

The background to the applications

MGC was incorporated in 2011. It employed a number of employees who the judge described for convenience as “healthcare professionals”, recognising that this is both a broad, and therefore somewhat imprecise, term, and also that it is something of a simplification since not all of MGC's employees were healthcare professionals.

The Appellants allege (and for present purposes it must be assumed that these allegations are factually correct) that, until it went into liquidation, MGC's business operated in the following manner:

i) MGC employed healthcare professionals such as doctors and nurses and entered into contracts of service with those employees.

ii) MGC seconded the services of its employees to recruitment agencies (“Secondees”) and had contractual relationships with those Secondees.

iii) The Secondees in turn sub-seconded the services of MGC's employees to “End Users”, in most cases an NHS Trust. The Secondees had contractual relationships with these End Users.

iv) When sub-seconded to End Users, MGC's employees provided services consisting of “medical care” or “care or medical or surgical treatment” within the meaning of Items 1 and 4 of VATA Schedule 9 Group 7.

v) MGC did not control the services provided by healthcare professionals that it employed. Thus, when providing “medical care” or “care or medical or surgical treatment”, MGC's employees discharged their professional duties within the framework set by the End Users.

vi) MGC's secondment of employees to Secondees and the Secondees' sub- secondments to End Users were on a “back-to-back” basis, so that, in particular:

a) MGC would not second an employee to a Secondee unless the Secondee would in turn sub-second the employee to an End User.

b) MGC seconded its employees to Secondees as healthcare professionals. The Secondees in turn sub-seconded the employees to End Users as healthcare professionals. End Users did not require MGC's employees to perform duties other than those of a healthcare professional.

vii) MGC charged Secondees a fee for the provision of a particular employee. MGC also charged its employees a “commission” consisting of a flat-rate weekly amount which MGC justified by the fact that it provided certain administrative and payroll services.

viii) On receipt of a fee from a Secondee, Mercy would deduct PAYE and employees' national insurance contributions (“NICs”) and its commission, and then pay the balance over to the employee concerned.

At the time it was carrying out this business, MGC thought (the Appellants say mistakenly) that at least some of the supplies that it made described in paragraph 3 above were standard-rated for VAT purposes, except to the extent that a particular concession (the details of which it is unnecessary to go into for present purposes) applied.

HMRC carried out an investigation into MGC's activities which culminated in it making assessments on MGC for under-declared VAT totalling some £21 million (“the Assessments”). This led to MGC becoming insolvent and entering liquidation.

In these proceedings MGC alleges that this under-declared VAT was the result of a significant VAT fraud perpetrated between at least 2015 and 2020. The VAT fraud is said to consist of MGC charging Secondees VAT and, save for small sums, not accounting to HMRC for that VAT, hence the under-declaration resulting in the Assessments.

MGC alleges that the VAT was misappropriated by the First Defendant, Mr Adegbuyi-Jackson, who was at all material times MGC's sole shareholder, with the assistance of the Sixth Defendant (Mr Adegbuyi-Jackson's wife), the Tenth Defendant (Mr Adegbuyi-Jackson's half-brother) and various corporate Defendants. MGC seeks equitable compensation from Mr Adegbuyi-Jackson for fraudulent breach of duty and proprietary remedies in respect of sums he has received. It makes proprietary claims against Mrs Adegbuyi-Jackson and the corporate defendants, as well as claims for equitable compensation for dishonest assistance. MGC also makes a claim for unlawful means conspiracy against Mr and Mrs Adegbuyi-Jackson.

By the VAT Defence, the Appellants seek to establish that MGC's supplies were exempt from VAT by virtue of Items 1 and/or 4 of VATA Schedule 9 Group 7, and hence that MGC does not owe HMRC the £21 million claimed by the Assessments. In the absence of any obligation to pay VAT to HMRC, the Appellants contend that there can have been no VAT fraud as MGC claims.

The legislative framework

Article 132(1) of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (“the Principal VAT Directive”) provides, so far as relevant:

“Member States shall exempt the following transactions:

…

(b) hospital and medical care and closely related activities undertaken by bodies governed by public law or, under social conditions comparable with those applicable to bodies governed by public law, by hospitals, centres for medical treatment or diagnosis and other duly recognised establishments of a similar nature;

(c) the provision of medical care in the exercise of the medical and paramedical professions as defined by the Member State concerned;

…”

These provisions are implemented by section 31 of VATA together with Items 4 and 1 respectively of Group 7 of Schedule 9 of VATA (as amended), which provide:

“ GROUP 7—HEALTH AND WELFARE

Item No.

1. The supply of services consisting in the provision of medical care by a person registered or enrolled in any of the following—

(a) the register of medical practitioners;

(b) either of the registers of ophthalmic opticians or the register of dispensing opticians kept under the Opticians Act 1989 or either of the lists kept under section 9 of that Act of bodies corporate carrying on business as ophthalmic opticians or as dispensing opticians;

(c) the register kept under the Health Professions Order 2001;

(ca) the register of osteopaths maintained in accordance with the provisions of the Osteopaths Act 1993;

(cb) the register of chiropractors maintained in accordance with the provisions of the Chiropractors Act 1994

(d) the register of qualified nurses, midwives and nursing associates maintained under article 5 of the Nursing and Midwifery Order 2001.

…

4. The provision of care or medical or surgical treatment and, in connection with it, the supply of any goods, in any hospital or state-regulated institution.

…

Notes:

…

(2) Paragraphs (a) to (d) of item 1 and paragraphs (a) and (b) of item 2 include supplies of services made by a person who is not registered or enrolled in any of the registers or rolls specified in those paragraphs where the services are wholly performed or directly supervised by a person who is so registered or enrolled.”

The VAT Defence

In summary, the VAT Defence runs as follows:

i) The Appellants argue that there is no distinction for VAT purposes between a supply of staff and a supply of the services performed by those staff. Rather, a supply of staff where the staff are to perform services of a given description is a supply of services of that description.

ii) Accordingly, for the purposes of Items 1 and 4 of Schedule 9 Group 7 VATA, the character of the supplies that MGC made was the same as the character of the services that the relevant employees provided.

iii) Therefore, to fall within Item 1, read together with Note 2, all that was required was that MGC should have seconded the services of employees falling within paragraphs (a) to (d) of Item 1, in order...