VAT due on full charge for temporary staff

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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.

Background

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.

Example

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.

Taxpayer arguments

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.

Reed case

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.

Final thoughts

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

Neil Warren is an independent VAT consultant and author who worked for Customs and Excise for 14 years until 1997.

Replies

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By hmlask
20th Aug 2018 10:44

When will we know if Adecco are going to appeal, or is the decision final?

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20th Aug 2018 10:33

VAT due on full charge for temporary staff.
For future refrence

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20th Aug 2018 10:41

Call me thick but if the workers were on the agency payroll I can't see how they had a leg to stand on. If non registered businesses want to avoid the Vat element all they have to do is put them through their payroll.

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to martinhayward
21st Aug 2018 10:21

You are very judicious. Good man

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20th Aug 2018 10:41

Call me thick but if the workers were on the agency payroll I can't see how they had a leg to stand on. If non registered businesses want to avoid the Vat element all they have to do is put them through their payroll.

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20th Aug 2018 10:41

Call me thick but if the workers were on the agency payroll I can't see how they had a leg to stand on. If non registered businesses want to avoid the Vat element all they have to do is put them through their payroll.

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20th Aug 2018 10:52

Adecco, and many other agencies, will not like this decision and doubtless are at this moment working on new contract structures to get out of the immense output tax liability it will cause as there is no corresponding input tax to offset it.

The first consideration is the cashflow implications to the agencies, then the clients (including government bodies), then the rest of business. The cost will end up with the businesses who use the temporary staff as they will then pay both the output tax to the agencies, together with the margin for the cost of capital which the agencies will introduce (howsoever described) and the VAT thereon, together with their own cost of capital for the additional funds.

Depending on far up or down the food chain the employer is, the final cost will end up with consumers. The consumers are you and I, and this will extend to pensioners and those on benefits - who will need an increase in benefits … and so it goes on.

I am certain the agencies will now adopt contracts which clearly split out the charge for finding the temp staff, and on appointment will transfer the staff to a "client payroll service" which will operate as a payroll agency thus charging no output tax on the staff salaries, although there would be tax to pay on the payroll operation service.

The Reed decision was correct, and HMRC is just trying to increase the VAT take. Adecco just needs to get its contracts in best order.

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By rbw
to dmmarler
20th Aug 2018 14:05

[quote=dmmarler]

"I am certain the agencies will now adopt contracts which clearly split out the charge for finding the temp staff, and on appointment will transfer the staff to a "client payroll service" which will operate as a payroll agency thus charging no output tax on the staff salaries, although there would be tax to pay on the payroll operation service. "

That seems to me effective for VAT purposes only if the “client payroll service” does *not* do what Adecco does now. To quote the CA judgment on that:
“Nevertheless, Adecco undertakes with these persons to pay them for the work they do for Adecco's clients and is classed as their 'employer' for various regulatory matters, including the working time regulations and payment of PAYE/NIC. Adecco's payment by its clients will be periodic and normally calculated as an amount representing the payment Adecco must make to and on behalf of the temp plus a commission element.”
So it seems to me the only way there’s VAT only on the commission is for the client to assume responsibility for those regulatory matters. Which rather begs the question why they should pay such a hefty commission in the first place.

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20th Aug 2018 10:53

Until reading the second last paragraph, my view on this was a massive "so what?".

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21st Aug 2018 09:51

It makes sense to me a humble lifetime scholar that the vat is due on the full said charged amount. The firm is suppling a worker - a service at £14 per hour. What's the fuss all about?

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21st Aug 2018 10:15

The Reed judgement is injudicious the learned judges were having a bad day.
The Adeco judgement makes sense - you can't tinker about with the service content provided.
£14 is chargeable not £4

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By dsh
21st Aug 2018 11:15

The problem arises in the supply of GP locums by these agencies. GP Surgeries cannot reclaim any VAT as their income is exempt. The VAT element on already expensive locums (already approx £1000 per day!!) will have to come out of the already tight budget, meaning more pressure on the already stretched service. (Locums are having to be used more & more because of the shortage of GP's - and those that are available are becoming locums because it is so lucrative).
The argument was that the supply of medical services via a locum should also be exempt.

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to dsh
21st Aug 2018 12:33

Very good point about locums.
We are at a point after 8 years of austerity and still growing debt that everyone is brought into the real world. A hospital porter earns £18000 pa. Polticians need to address the NHS problems where so much money is wasted.
The Adeco judgement makes sense.

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to dsh
22nd Aug 2018 10:20

It is not just GP locums, it is all hospital staff including consultants and other doctors bought in to fill vacancies through agencies. Only nurses (who are on Whitely rates) are exempt at the moment under the Reed decision. The NHS does not have the output tax to offset against all these inputs, nor the cash. So in the scheme of things we pay the output tax.
Perhaps after Brexit we can have a purchase tax rather that VAT, so something which is more appropriate to our market place.

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12th Sep 2018 12:57

Good article, well written, I love an example or two. I also like things simple and un-complicated

Extract above
'described as non-employed temps'

Fancy being known as a non employed temps, in the employment world is there any worse term to be known as, I wonder what I am known as.

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