Pertemps Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 06 July 2018 |
| Neutral Citation | [2018] UKFTT 369 (TC) |
| Date | 06 July 2018 |
| Court | First-tier Tribunal (Tax Chamber) |
[2018] UKFTT 0369 (TC)
Judge Ashley Greenbank
Timothy Brennan QC, instructed by Anthony Collins Solicitors LLP, appeared for the appellant
James Puzey, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Value added tax – Operation of salary sacrifice scheme to provide travel and subsistence payments to employees – Whether supply for VAT purposes – Whether economic activity – No – Appeal allowed.
The FTT considered whether a salary sacrifice scheme providing travel and subsistence payments to employees resulted in the employer making a taxable supply for VAT purposes.
Pertemps operated a salary sacrifice scheme for its employees called the “Mobile Advantage Plan” or MAP. Under MAP (which was not compulsory or available to all employees), employees accepted a reduced salary in exchange for receiving a tax-free allowance to cover travel and subsistence. The scheme benefited employees because their take-home pay increased as a result of tax and national insurance savings. As well as the allowance for expenses, salary was reduced by a “MAP adjustment” being 50p or £1 per shift at different times during the scheme's operation.
The MAP scheme was cleared by HMRC in respect of the income tax and national insurance aspects.
HMRC determined that the MAP adjustment was consideration paid by employees to Pertemps for its supply of operating the scheme and, accordingly, assessed for VAT due.
Pertemps argued that it was not making a supply to its employees but that, if it was, the supply was exempt as it as a “dealing in money” within VATA 1994, Sch. 9, Grp. 5, item 1.
The Tribunal agreed with HMRC that Pertemps was making a supply to its employees but that supply was not part of an economic activity and, therefore, it was outside the scope of VAT. For example, MAP is not a service that could be provided by a third party supplier, it is part of the employer-employee relationship. The Tribunal also agreed with Pertemps that, if it was part of an economic activity, it would have been an exempt supply.
This case was decided on the particular facts of the MAP scheme and will therefore have relatively little impact outside of this. The MAP scheme ceased to generate tax and NI savings on 6 April 2016 following a change to the law regarding temporary workplaces.
However, the decision contains a useful analysis of the most fundamental principles of VAT, namely when is a supply made for consideration and when is a supply made as part of economic activity.
[1] These are appeals by the appellant, Pertemps Limited (“Pertemps”), against two decisions of the respondents, the Commissioners for Her Majesty's Revenue and Customs (“HMRC”):
- the first was contained in a letter dated 17 April 2013 and confirmed, following a review, in a letter dated 17 January 2014 and is reflected in a notice of assessment dated 6 December 2013 for value added tax (VAT) in the amount of £529,574 for the periods 07/09 to 01/13;
- the second was contained in a letter dated 4 December 2014, in which HMRC notified Pertemps of an assessment to VAT of £186,344 for the periods 04/13 to 07/14.
[2] There are further assessments standing behind these appeals.
[3] The decisions relate to the operation by Pertemps of a scheme for the provision of travel and subsistence expenses to employees. The scheme was known as the “Mobile Advantage Plan” or “MAP”.
[4] There are three issues before the Tribunal. I have described them in more detail below, but, in summary, they are:
- whether or not the operation of MAP involved a supply of services for VAT purposes by Pertemps to participating employees;
- if so, whether or not the supply was an exempt supply falling within item 1 of Group 5 of Schedule 9 to the Value Added Tax Act 1994 (VATA);
- if Pertemps made a taxable supply, whether HMRC was entitled to collect the tax or whether it was precluded from doing so by the issue of Business Brief 28/11 for periods to which it applied as a result of application of its powers of collection and management.
[5] I was presented with an agreed bundle of documents for the hearing.
[6] The bundle contained two witness statements on behalf of Pertemps:
- a statement of Ms Tracy Evans, Group HR and Quality Director of Pertemps; and
- a statement of Mr Spencer Jones, who was Group Tax Director of Pertemps in the period to February 2012 and thereafter Group Finance Director of Pertemps.
[7] The bundle also contained two witness statements on behalf of HMRC:
- a statement of Mr Richard Pratt, officer of HMRC, responsible for direct tax compliance matters;
- a statement of Mr Mark Summers, officer of HMRC, a member of HMRC's Fraud Investigation Service responsible for VAT compliance.
[8] All of the witnesses gave oral evidence and were cross–examined on their statements. Much of the witness evidence related to a further ground of appeal (related to the issue that I have described at [4](3) above) – namely whether or not HMRC had agreed to forgo collection of the tax in the course of its handling of the enquiries in relation to the operation of MAP or in giving the direct tax dispensation to which I refer below. This ground was withdrawn by Pertemps in the course of the hearing.
[9] Following the hearing, and before I had issued the decision notice, the Court of Appeal handed down its decision in Wakefield College v R & C Commrs [2018] BVC 22 (“Wakefield College”). The decision in that case was of some relevance to the first issue before the Tribunal and so I requested submissions from the parties on the extent to which their arguments on the first issue as advanced at the hearing might be affected by the decision in the Wakefield College case. Both parties made written submissions, which are reflected in my summary of the parties' arguments at [103] to [126] below, and which I have taken into account in this decision.
[10] I have set out in the following paragraphs my findings of fact.
[11] I will first set out a summary of MAP and the direct tax consequences as they provide the context for the remainder of the factual background to these appeals. I will then describe the contractual arrangements, the practical operation of MAP, before moving on to the background as to how the VAT issues arose. For the most part, there is little or no dispute between the parties on these matters.
[12] Pertemps is the representative member of a group VAT registration. Members of the group carry on business as a recruitment agency which provides temporary and permanent workers to clients.
[13] The issues before the Tribunal relate to the provision of temporary workers by Pertemps and its subsidiary companies to clients.
[14] Some of the transactions referred to in this decision notice were entered into by subsidiaries of Pertemps which were members of the VAT group of which Pertemps was the representative member. For ease of explanation, I have referred to these transactions as being carried out by Pertemps. No issue arises from the fact that transactions were carried out by separate members of the group.
[15] As I have mentioned, these appeals relate to workers who were working on temporary assignments for clients. The typical worker would work for a short period for one client of Pertemps at that client's premises before moving to another assignment with another client at that client's premises.
[16] In all relevant periods, these workers were employees of Pertemps; they were engaged on indefinite contracts of employment with Pertemps which continued even if there was a gap between the assignments with different clients. In this decision notice, I have referred to these workers as “flexible employees”, as this was the term employed by Pertemps.
[17] The contracts of employment of flexible employees guaranteed a minimum number of hours of work each year. For the periods in question, that minimum number was typically 336 hours, approximately 7 hours per week.
[18] Flexible employees were offered the opportunity to participate in MAP. Under MAP, a flexible employee agreed to a reduction in the wage which he or she would earn. In return, Pertemps agreed to make a payment to the employee of an amount of travel and subsistence expenses. The amount of the reduction applied to the employee's wages was equal to the amount of the expenses payment plus a fixed amount.
[19] The fixed amount was at different times in the periods in question 50p or £1 per shift. The parties referred to the fixed amount as the “MAP adjustment”. I have used the same term in this decision notice.
[20] Although the total amount of the payments (before tax and national insurance contributions) to which an employee was entitled from Pertemps under MAP was less than that to which he or she would have been entitled if he or she had not elected to participate in MAP (by the amount of 50p or £1 per shift), the operation of MAP did provide some benefits to flexible employees. These are described in more detail below, but, in summary, the employee obtained a cash flow benefit because the payment of the expenses was not subject to deduction of income tax or national insurance contributions.
[21] Steps were taken to ensure that employees for whom MAP was not suitable – for example, those for whom a reduction in wages would breach the national minimum wage requirements – did not participate in MAP or were unable to do so.
[22] The benefits of MAP are derived from the treatment of the payment of expenses for income tax and national insurance purposes. It requires a little explanation.
[23] A payment of expenses made by an employer to an employee is usually treated as earnings from employment for the tax year in which the payment is made by virtue of s72(1) Income Tax (Earnings and Pensions) Act 2003 ...
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