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VAT On Temporary Employment Agencies Cast Into Doubt

by Jason Gorringe,, London

15 December 2015

The UK First-tier Tribunal has ruled against a taxpayer that brought an appeal on the basis of the Tribunal's earlier decision in Reed Employment, only to have its almost-identical appeal dismissed. The case concerned VAT imposed on the fees it received from clients for introducing temporary workers (temps) and managing other administrative aspects.

The case concerned Adecco UK Limited and the services it rendered as part of providing non-employed temps to clients under tripartite agreements. Adecco had accounted for VAT on the full charge paid by its client – specifically, on the element of the charge paid by the client that was equivalent to or represented the wages paid to the temp (including amounts paid in tax); and on the element of the charge effectively retained by itself, for the introductory service.

Adecco brought a claim for the period April 1, 2007, to December 31, 2008, totalling some GBP11.12m (USD16.86m) following the FTT's ruling in Reed Employment in March 2011. In that case, the Tribunal found that Reed Employment, in providing non-employed temps to its clients, had supplied introductory services in return for a commission and found that it was not liable to account for VAT on the element of the charge representing the wages that it received from its clients and paid to the temps.

HMRC rejected Adecco's claim however, arguing that it had supplied the services of the non-employed temps as well as the introductory services.

Despite not appealing the ruling in Reed, HMRC successfully argued in Adecco that the economic reality in this case is consistent with a Redrow "follow the liability to pay" analysis. In its eyes, the temps (on taking up an assignment) provided to Adecco the service of agreeing to carry out the assignment as instructed by Adecco's client in return for payment by Adecco; Adecco then made a supply of the temp's services to its client.

The appellant's position was that, whatever duties the temp owed Adecco under the contract with Adecco, under Adecco's contract with its client, it had no responsibility for the work performed by the temp and therefore its services were no more than introductory services with certain admin services, such as operating the payroll, tacked on. This would have been in line with the ruling and circumstances in Reed, where the Tribunal placed importance on the fact that Reed and the temp owed each other no obligation to offer or to accept assignments (under "zero-hours contracts," as in Adecco); and there was a lack of control by Reed over the temp's work at any time.

The FTT Judge in Adecco UK Ltd v. HMRC ([2015] UKFTT 0600 (TC)) looked at the facts of the case afresh.

In its decision on November 27, the Tribunal in particular looked at to whom the temps supplied their services. The Tribunal agreed that, in reality, Adecco did not monitor the performance of its temps. Further it found that it would be Adecco's client, rather than Adecco, that would terminate an assignment in the event that a temp's performance was unsatisfactory, although both were empowered to do so.

However, the Tribunal instead in particular relied on the terms of the contracts between Adecco and temps and Adecco and its clients to arrive at its decision. It found that Adecco assumed the liability of paying the workers for the work that they performed, rather than facilitating those payments.

The Tribunal highlighted that, within the contract, Adecco agreed with its clients that it would be liable for paying the workers, with the client being absolved of any liability to pay the temps. It said: "If the intention had been that Adecco merely discharged the client's liability to pay the workers, the contract with the client would not have required Adecco to contract directly with the temps, nor would it have required the client to sign timesheets... The contract was clearly drafted to protect Adecco's position on the mutual understanding that Adecco was liable to pay the worker for the work irrespective of whether its client paid it."

Further, the Tribunal attached importance to the fact that clients very often did not know the rate of pay earned by the temp; they only knew this information from their own calculations, if they had negotiated a percentage-based commission with Adecco. The Tribunal further highlighted that, after the temp was introduced to the client, no contract was signed between the client and the temp, suggesting that Adecco's services, as a whole – and its role in the transaction – went beyond introductory services.

The Tribunal Judge highlighted that, "when considering what a person has actually agreed to do under a contract, the court considers the genuine contractual terms, which will be terms that have been agreed to for commercial reasons, whether or not they represent a negotiated compromise and whether or not the appellant might have preferred a less onerous term. The fact is that, in its contract with the temp, the appellant agreed to pay the temp for his work. And that is, in my view, very significant in defining what it was Adecco provided to its client under the client contract discussed below."

Further, looking at the nature of the fees received – comprising an initial one-off fee and an ongoing fee – the Tribunal highlighted that an introductory service is a one-off supply and the supply of staff is continuous until the contract comes to an end. The presence of both suggested there were two separate supplies, it said.

Ruling against the appellant, the FTT Judge said: "Adecco's position seems to be predicated on the basis that an agreement by A with B to provide goods or services to C as a matter of economic reality must be seen as a supply by A to C as the goods/services effectively move directly from A to C. But that is a wrong legal analysis. It is wrong to say that the supply must be by A to C because the economic reality is that the goods/services in reality move directly from A to C. It is clear that 'economic reality' means something else... The contractual position is that the temp has agreed with Adecco to do what the client tells it to do, based on its contract with Adecco."

The FTT Judge said she expects the ruling to be appealed, given the FTT's earlier ruling in favor of Reed Employment (which was not appealed by HMRC). It highlighted that Reed concerned the same tax issue and "similar if not completely identical facts."

TAGS: court | compliance | tax | VAT legislation | law | United Kingdom | fees | payroll | agreements | legislation | services | VAT case law | VAT compliance matters | Employment

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