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Tri-partite arrangements / Employment & Recruitment Services / Placing Temps – the Adecco decision

7th Jan 2016
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Many recruitment and employment agencies have been waiting for the First Tier Decision in Adecco Ltd. Although the case was heard back in May 2015, the decision was not released until late November. The decision applied to a number of companies, all of which are Adecco companies. At the time of the supplies in question, some were separately registered for VAT; later they joined the same VAT Group.

The decision is found here: http://www.bailii.org/uk/cases/UKFTT/TC/2015/TC04743.html

The question related to the VAT liability of Adecco on payments made to it by its clients in respect of work carried out by temporary workers (Temps) introduced by Adecco to its clients. The Tribunal spent a lot of time reviewing the contractual position, and then commented that the contractual position may not determine the direction of the VAT supply. Rather, it is the starting point for determining whether and to whom and of what the supply is made (para 89). The Tribunal’s initial conclusion on the contractual position was that Adecco was providing the work of the temp to its client; and the client paid Adecco the full fee for the work in its own right (para 118). The key point was that the temp owed a legal obligation to Adecco, not to its client; Adecco owed the temp the legal obligation to pay the temp for the work. Adecco owed the client the legal obligation to have the work carried out by the temp; and the client owed Adecco the legal obligation to pay for that work. The question was whether the economic realities meant that the contracts did not reflect the VAT supply position (Para 178).

The Tribunal commented on the Reed Employment Ltd case (http://www.bailii.org/uk/cases/UKFTT/TC/2011/TC01069.html). HMRC argued that Reed was wrongly decided. It was ‘very strange indeed’ that HMRC had not appealed Reed, especially given the sums of money involved (over £130m). The Adecco decision boldly stated ‘I am unable to agree with the appellant that this case was rightly decided on these grounds’ (para 188). The Reed decision, being another FTT decision, was not binding on the Tribunal in Adecco.

The Tribunal also reviewed key cases involving tripartite agreements. It highlighted two apparently contradictory approaches:

  • The ‘follow the liability to pay’ rule (cases: Redrow/Tolsma/Aimia); and
  • The ‘economic reality’ rule (case: WHA/Baxi).

HMRC will be annoyed at the Tribunal’s comment that the ‘follow the liability to pay’ rule must apply unless the economic reality is inconsistent with the contractual position (para 270). Generally, HMRC would have to demonstrate this inconsistency.

In conclusion, the Tribunal found against Adecco, but then was consoled by the fact that the decision will be appealed, and be decided by a higher authority (para 308). Numerous agencies awaiting the resolution of the issue will have to wait for many more months.

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