HMRC has triumphed over a group of employment agencies which must now pay VAT on the full fee it charges for staff supplied and not just on the commission element.
Adecco UK Ltd and others (EWCA Civ 1794) failed to convince the court of appeal that temporary workers on its payroll (described as non-employed temps) were actually working directly for the client rather than for Adecco.
A simple example illustrates the principles considered in this case by the court.
John enjoys travelling around the world so only works for six months a year in the UK on a temporary basis doing administration work through a number of agencies. He has agreed to work for ABC Recruiters for £10 per hour.
He will be paid through ABC’s payroll, not on a self-employed basis. He will work at the premises of ABC’s client Car Insurance Ltd, carrying out duties under the instruction of the client. ABC will charge Car Insurance Ltd £14 per hour for his time.
In this situation, is output tax due on the £4 net commission earned by ABC Recruiters (I have ignored National Insurance in this example) or the full fee of £14? That was the question considered in the Adecco case.
Contracts and economic reality
To arrive at a sensible VAT outcome, it is always necessary to consider both the contractual position of a deal and the commercial reality of what is happening in practice. In cases where there is a contradiction between the two, the commercial reality takes precedence.
For example, my company has contracts to provide VAT consultancy services to accountants but if I actually provide dentistry services (perish the thought) then this becomes the key fact. The upper tribunal (UT) and court of appeal agreed that there was no contradiction in the Adecco case.
The contract between temporary worker and Adecco, and the parallel contract between Adecco and its clients, both indicated that the temporary worker was working for Adecco, and Adecco was providing temporary staff to its clients, with output tax payable on the full charge.
The taxpayer highlighted key words in the contract that suggested the temporary workers were working for the client and not for Adecco, with the client having the choice of which temps it used, and also having control of the temps in terms of what duties they carried out. There was no appraisal or performance monitoring done by Adecco, and terminations were decided by the client.
However, HMRC highlighted (and the court agreed) that the client would not appreciate any distinction in a contract involving an employed or non-employed temp and that the taxpayer’s argument that Adecco was only providing an introductory service and ancillary (payment) services was flawed. The contract said that the temp was working “through Adecco” and this was the commercial and contractual reality.
The background to this appeal goes back to the 2011 case of Reed Employment Ltd (TC01069), where the first-tier tribunal agreed that Reed was only providing an introduction service for temp workers, in a situation almost identical to that of Adecco.
So Reed was able to charge VAT only on its commission, not to the full fee, and as a result enjoyed a reduced output tax bill on its services. HMRC issued Revenue & Customs Brief 32/11 after the decision, stating that they “do not regard Reed as having any wider impact.” The court of appeal in the Adecco case commented that the Reed case was “wrongly decided.” A false dawn, so to speak.
The Adecco decision has led to suggestions by some that the law should be changed so that employment agencies should only charge VAT on their net commission in relation to services provided by non-employed temps. They highlight the cost to charities as an example of how the current rules are unfair. I disagree.
The key principle of the VAT system is that it must always be clear who is working for whom and doing what. The last thing that the VAT world needs is similar confusion to that which the direct tax world experiences with employment contracts and IR35.
Any change to the VAT rules would also be very sensitive politically – think of the outrage there would be if banks (or other partly exempt businesses in the financial services sector with an input tax restriction) were able to pay less VAT on their overheads!
The court of appeal, FTT, and UT, all ruled in favour of HMRC in the Adecco case so there was clarity amongst the judges. Let’s keep things simple… for a change!
About Neil Warren
Neil Warren is an independent VAT consultant and author who worked for Customs and Excise for 14 years until 1997.