Tripartite supplies and economic reality – new FTT ruling

Adecco was a provider of recruitment services. The appeals concerned the VAT liability of Adecco on payments made to it by its clients in respect of work carried out by temporary workers (‘temps’) introduced to the clients by Adecco.

The issue

Temps were on the books of Adecco but not considered to be employed by that company. Adecco introduced them to clients looking for a temporary worker to undertake an assignment. The temps were not obliged to accept any assignment offered and Adecco was not obliged to find them an assignment. Adecco undertook to pay temps for work done for Adecco’s clients and was classed as their ‘employer’ for various regulatory matters, including the working time regulations and payment of PAYE/NIC. Adecco’s payment by its clients was periodic and normally calculated as an amount representing the payment Adecco made to the temp plus a commission element. Adecco accounted for VAT on the full charge paid by its client for the services of the temps.

On 24 March 2011, this Tribunal (Judge Roger Berner) released a decision in the case of Reed Employment Ltd [2011] UKFTT 200 (TC) (‘Reed Employment’). In that decision the Tribunal found that the employment bureau appellant in that case providing non-employed temps to its clients was making a supply of introductory services to its clients in return for its commission. It was therefore not liable to account for VAT on the element of the charge representing the wages which it received from its clients and paid to the temps.

Following this decision, various repayment claims relating to charges paid for non-employed temps for the period 1 April 2007 to 31 December 2008 were submitted to HMRC by Adecco totalling some £11,125,661. Despite Reed Employment, HMRC rejected the claims.  The reasons for the rejection include the ground that the appellant was liable to account for VAT on the full charge paid by the clients because, argued HMRC, it supplied the services of the non-employed temps and was not merely supplying the service of introducing temps to its clients.

The facts

The Tribunal examined the standard terms of Adecco and representative contracts with two client banks. A large part of the appellant’s case relied on the fact that it was clear under the contracts, and indeed clear as a matter of practical and economic reality, that it was the client who told the temp what to do on a day to day basis. Thus the contracts provided that the temp would be subject to the ‘legitimate instructions, monitoring, direction, supervision, management, and control’ of the client and indeed, were this not the case, the client would presumably not have been prepared to pay a fee for the temp. Nevertheless, under the contract the temp did owe duties to Adecco with respect to the work it performed for Adecco’s client, for example to keep confidential business matters between Adecco and its clint and to perform the work professionally, promptly and efficiently. However, Adecco did not monitor the performance of its temps.

The legal position – contractual

 The Tribunal reached the following conclusions:

• The contractual position is the starting point when determining whether and to whom and of what a supply is made;
• Adecco’s contract with its clients must be seen in the context of its contract with its temps and seen in the context of the client’s legal relationship (or otherwise) with the temps.
• Taking an overview of the tri-partite situation, Adecco owed to its temps the obligation to pay them for all the work undertaken for Adecco’s clients, irrespective of whether Adecco’s clients had paid Adecco. Contractually, therefore, the temps’ obligation to perform the work for Adecco’s clients was owed to Adecco, because Adecco provided the consideration.
• The contract reflected practical reality whereby the temps were no one’s employees and had no job security;
• If Adecco merely introduced the temp to its client, it would be for the client to enter into a contract with the temp to take him on as a worker.

 The legal position – the economic and commercial realties

The Tribunal stated that regard must be had to all the circumstances in which the transaction or combination of transactions takes place. HMRC’s case was that Adecco mades supplies of staff to its clients and was accountable for VAT on the full amount paid by the client.   To this end, HMRC relied upon the authority of Tolsma C-16/93 [1994] STC 509 for the proposition that for a VAT supply to take place there must be a legal relationship between the supplier and the supplied. In the absence of a contract between temp and client there was no legal relationship between them. The appellants, on the other hand argued that the economic realities of the arrangements were not reflective of the VAT position, because Adecco was not obliged to find work for the temp and the temp was under the control and supervision of the client and not Adecco. If this was correct, the true position was that the temps made a direct supply to Adecco’s clients of their services as temps.

The Tribunal conducted a review of the case law in this area. Based on that review, the Tribunal concluded that the FTT’s decision in Reed Employment Ltd [2011] SFTD 720, was wrongly decided.  The Tribunal stated that Redrow [1999] UKHL 4, a decision of the House of Lords, is the leading authority on identifying the recipient of a supply in a tripartite situation and lays down the principle that the nature of the services and the identity of the person to whom they are supplied cannot be determined independently of each other, for each defines the other. Redrow gives the principle that a supply is doing something for consideration, so the court must follow the money: the person who is liable to pay the consideration receives the supply.  The Supreme Court’s decision in LMUK/Aimia [2013] UKSC 15 had not overruled Redrow.

The Tribunal’s conclusions 

The FTT concluded that a VAT supply, ordinarily at least, requires a legal relationship between the supplier and recipient under which the supplier is obliged to make the supply and the recipient is liable to pay for it.  Nevertheless, where the economic reality of the legal relationship is such that it results in final consumption of goods or services by a consumer in circumstances where in effect there is no VAT charge on that consumption then this normal rule is overridden, because the ultimate purpose of the Principle VAT Directive is to tax final consumption.

In conclusion, in a situation where B agrees to pay A to provide goods and/or services to C, and C agrees with B to pay for the goods and/or services provided by A, then a Redrow ‘follow the liability to pay’ analysis applies to decide to whom A’s supply is made. This is because the legal relationships reflect the economic reality and the outcome is consistent with the Principle VAT directive because final consumption is taxed.

Levy and Levy comment

The decision of the FTT follows on from the classical ‘Redrow’ analysis and it is unfortunate that we now have two conflicting decisions of the FTT in this respect. Clarification from the UT as to which analysis is correct will be welcome.

 

Levy and Levy – the tax investigations and resolution specialists in London and Tunbridge Wells.