The Upper Tribunal decision in the case of Adecco (UKUT0113) will be a great disappointment to charities that are obliged to seek labour from bureaux who give access to self-employed temp workers.
The hope was that arguments could be used from a successful earlier appeal, concerning similar arrangements, in the case of Reed Employment (UKFTT200). HMRC, whilst disagreeing with the earlier decision in Reed, chose not to appeal it. That forced another appeal to be taken by Adecco. But there were some critical differences, in that the earlier appeal related to differently drafted contracts, and these applied under earlier, now defunct, regulatory provisions.
The essential reason that the Reed appeal succeeded was that the agency (Reed) was not able to supply a worker over which it had scant control. Hence, the money passing through its hands, onward to the worker, could not be consideration for the service it provided. All that remained was its introductory ‘commission’, which, alone, was subject to VAT.
This attractive ‘real world’ style of analysis has to be tempered with another aspect, however, which is what the contracts have to say about the relationship. Adecco’s attempt to run a similar point in regard to its more modern contracts, which were intended to conform to a different regulatory regime, did not meet with the approval of the First tier Tribunal, and has not managed, on appeal, to convince the Upper Tribunal. Both tribunals adopted the view that one starts by interpreting contracts and then looks at commercial and operational aspects simply to confirm (or refute) what the contract says. Where there is no disjunction between the contract and the real activities, the contract defines the VAT position. In this case, and irrespective of the practical issue of whether a worker could be physically controlled by the bureau, the service under the contract was that of supplying the worker, and not of mere introduction.
The First tier Tribunal muddied the waters by choosing to disagree with the judgement in Reed, whereas it would have been open to it to say that the facts were different. This may have given encouragement to Adecco, in that the appeal perhaps appeared to be a contest between two precedents. But the Upper Tribunal skirted this by saying that the appeal only lay on the facts of the appealed case, and had nothing to do with facts under a previous case that had not been appealed. As the facts were probably different, there was no obvious conflict.
The next question, then, is whether the facts of Adecco’s case justify a further appeal, and, even so, whether HMRC would always seek to argue that there is no general point of principle and each case will always depend on its facts, which will mean that all bureaux would be required to litigate to benefit from a favourable decision. We cannot be sure about either of these points, but the Upper Tribunal decision is, without doubt, a significant set-back in regard to this principle. Adecco has 30 days to decide whether to appeal HMRC’s decision and a further update will follow.
This decision will be disappointing for many charities which, with CTG, had felt that a needless barrier to flexible working practices had been created by the huge tax differential between ‘old fashioned’ employed staff and the more flexible model of human resource usage entailed in temporary workers. This, it appears, disproportionately impacts on exempt sectors such as charity, care, education, and housing.
Graham Elliott is CTG’s Technical Adviser
Background information on the case including the original analysis of the First tier Tribunal decision can be found here. Charities and advisers may also be interested to read CTG’s VAT case law tracker.