Employment bureau Adecco supplies clients with temps. Although temps may be employed by Adecco or may be contract workers, the decision concerned the VAT position in relation to non-employed temps. It hinged on whether Adecco should be treated as making a supply of staff or just a supply of introductory services.
The Court of Appeal agreed with HM Revenue & Customs (HMRC) that Adecco was making a supply of staff so that VAT should be charged on the entire fee paid by clients, which included the remuneration paid to the temps by Adecco. The company had argued that VAT was only due on the commission element as the temps supplied their services directly to the clients.
Adecco had a contract with each non-employed temp which provided that the temp would provide services to a client through Adecco in return for payment from Adecco. There was no contract between the temps and the client.
"There can plainly be no question of the temps having provided their services under contracts with the clients: no such contracts existed," Lord Justice Newey said in his judgment. "Whatever scope there may be for argument as to the extent of Adecco's obligations to its clients, the contractual position must, I think, be that the temps' services were provided to clients in pursuance of the contracts between, on the one hand, Adecco and its clients and, on the other, Adecco and the temps."
In 2011, in a similar case concerning non-employed temps provided by Reed, the employment bureau, the first-tier tax tribunal took the opposite view, deciding that the supplies by Reed to its clients in respect of the temps were "supplies of introductory services and other ancillary services”.
In the Adecco case, the Court of Appeal said that the Reed case was wrongly decided.
"Unsurprisingly, the contractual provisions that applied as between Reed and its clients and temps were not identical to those relevant to the present case," the judge said. "I do not think, however, that the distinctions can justify the conclusion that the FTT arrived at in the Reed Employment case. It seems to me, with respect, that the case must be considered to have been wrongly decided."
Ian Hyde, a tax expert at Pinsent Masons, the law firm behind Out-law.com, said: "The decision resolves the confusion following the contrary decisions reached by the tribunals in the Reed and Adecco cases and confirms HMRC's view of the position."
"VAT is an important consideration in relation to supplies of staff, particularly where the client is VAT exempt so that any VAT paid will be a real cost to the business," he said.
It is also a very topical issue where agencies are not involved and staff are engaged through a personal service company (PSC), Hyde said. If the PSC is making supplies above the £85,000 VAT registration threshold it will need to register for VAT and charge VAT to its client.
Under the current rules, often referred to as 'IR35', when an individual provides services to a private sector client through a PSC, employment taxes have to be paid if the individual would have been regarded as an employee of the client, had the individual not contracted through the PSC. However, the income tax and national insurance contribution (NIC) liabilities fall on the PSC not the client.
As HMRC considers that the IR35 legislation is not working effectively, and non-compliance is widespread, it is consulting on a proposal to extend the public sector off-payroll rules to the private sector.
Under the public sector rules, which have applied since April 2017, public authorities are responsible for determining the employment status of those they engaged through PSCs or other intermediaries. They are obliged to deduct income tax and employee NICs and account for employer NICs in respect of payments to PSCs where the individual would have been an employee if engaged directly by the authority rather than through a PSC.
"If the government decides to go ahead with the proposal to extend the public sector off-payroll working rules to the private sector, the VAT consequences need to be considered in determining the right strategy to manage the IR35 risk," Hyde said.
"If the client decides to continue engaging the individual through the PSC but accepts tax is payable by it under the widened IR35 rules, the PSC will still need to charge and account for VAT on the gross fee paid by the client. This potentially makes the arrangements unattractive from the tax perspective for VAT exempt clients and the individual," he said.