VAT and the supply of temporary staff
The Court of Appeal has dismissed Adecco’s appeal that its supply in relation to the provision of ‘non-employed’ temps is no more than an introductory service. As a result, VAT is due on the full payment received from Adecco’s client (wages plus commission).
Following the decision in Reed (LON/2004/0130), where it was decided that their supply was solely the introduction of the temporary worker, Adecco submitted a claim for overpaid VAT (approximately £11m). HMRC rejected the claim and Adecco appealed. Their appeal was dismissed at the First Tier and Upper Tier Tribunal.
It was accepted by Adecco that its supply of employed temporary workers was subject to VAT on the full payment received from the client. It was also accepted that where Adecco introduces a contract worker to a client for a one off fee, it is only the introduction fee that is subject to VAT. The appeal relates solely to non-employed temps. They are not ‘on the books’ of Adecco and they have no obligation to find them an assignment. However, where they do find them an assignment they are, for regulatory reasons relating to e.g. PAYE/NIC, considered an employee.
Adecco argued that the previous decisions did not look beyond the contractual provisions at the ‘economic and commercial reality’ of the transactions. It was merely the regulatory framework that prevented Adecco from paying the temps as agent. They also pointed out certain clauses in the contract which they believed supported their case. For example, the contract stated ‘the services to be provided by the temp to the client’ and that the temp would be under the client’s ‘direction, supervision, management and control.’
The Court of Appeal disagreed with the arguments put forward by Adecco on the following basis:
- The temps could not provide services under contracts with the clients as no such contract existed
- The contract between Adecco and the client referred to the temp being supplied through Adecco
- Adecco paid the temps on its own behalf, as dictated by the regulatory framework. There is no reason the VAT position should not follow the legal arrangements in place
- Adecco charged a single sum per hour work, the remuneration was not split between commission and pay
- The same contract was used for employed and non-employed temps
- There is no suggestion that the contractual provisions were artificial or a sham
The Upper Tier stated that determining the nature of a supply is a two stage process. Firstly, the contractual position should be analysed and secondly, it should be considered whether the contractual position reflects the economic reality. It is normal for the contractual position to reflect the economic reality but this will not be the case if the arrangement is artificial. This is something that has been analysed at length in a number of significant cases such as Secret Hotels2 Ltd, WHA Ltd and Airtours.
The decision in the Adecco case stated that both contractually and as a matter of economic and commercial reality, the temps services were supplied to clients via Adecco. The Court of Appeal went on to say that although the contracts in Reed differed from those in Adecco, the distinctions were not enough to justify the earlier decision and that it was felt it was wrongly decided.
This additional VAT charge will be extremely bad news to charities, not for profits and other entities that use temporary workers and are unable to reclaim all of their VAT. Due to significant impact the decision may well be appealed for a final comment on this matter.
If your business or charity is affected by this matter please get in touch with VAT Partner Alison Birch:
Written January 2019.