The Upper Tribunal heard Adecco’s appeal between 5 and 7 December 2016.

This is an important case for the sector as it challenges HMRC’s position on the VAT treatment of temporary workers – an area of major cost for many CTG members.  CTG has worked with Deloitte for a number of years to bring this case against HMRC and was supportive of Adecco’s decision to appeal the rather unusual decision of the First-tier Tribunal in favour of HMRC (analysis of that case can be found here).

Unfortunately the Upper Tribunal dismissed the appeal – further information can be found in this commentary by Graham Elliott.

Upper Tribunal hearing

Adecco’s submissions

• Adecco presented a strong case based on the facts and business model of Adecco in the context of the regulatory and legal constraints which exist within the employment sector (in relation to temporary workers or “temps”).

• Adecco argued and evidenced that it provided nothing more than a service of introduction and payroll services to clients.  This is the service for which Adecco is remunerated by way of its commission.

• The Temps provide their services to the clients.  Adecco undertakes to pay the Temps on behalf of the client.  This arrangement, and the contractual framework that supports it, had to be adopted by Adecco because of the introduction of the Employment Conduct Regulations which meant that employment agencies like Adecco had to reconstitute themselves as “employment businesses” (i.e. Adecco was required (by law) to have a contract with the Temps under which it was liable to pay them whether or not the client paid the Temps).

• Notwithstanding the change in the regulatory and contractual environment, the economic and commercial reality has remained constant.  There is a “legal arrangement” (Lord Neuberger in the Supreme Court in Airtours) between the three parties via Adecco and the contractual framework that it had to set up.  Further, there is no requirement for VAT purposes for a direct contract between the Temps and the client for there to be a supply for VAT purposes.  This is illustrated by Baxi where the CJEU found that the payment from Baxi to the @1 Group (@1) could be divided in to two elements, one of which was third party consideration for the supply by @1 of goods to customers.  This was so despite the fact that there was no contract between @1 and the customers to whom it made the VAT supply.  The contractual relationship was between customers and Baxi.

In summary, Adecco says it should succeed and is only liable to account for VAT on its commission charge because this is (on the evidence) all that Adecco supplies, namely introductory and payroll services; it is perfectly possible for a party to pay for supplies it does not receive (Baxi etc.); and, in any event, the payment of Temps by Adecco is third party consideration.

HMRC’s submissions

• HMRC argued that it was significant that there was no contract or legal relationship at all between the Temps and the clients.  HMRC placed reliance on the contract between Adecco and the Temps (ignoring the Employment Conduct Regulations) to show that the contractual and economic reality was that Adecco was supplying a service or taxable supply of staff to the client.

• HMRC argued that the contract between the Temps and Adecco stated that the Temps would do the work Adecco asked him/her to do (i.e. whatever Adecco’s clients wanted).

• Importantly, HMRC argued that Adecco’s contracts were inconsistent with the position being put forward by Adecco in this case (even though Adecco emphasised that it had no choice in contracting in this manner but was bound to by the Employment Conduct Regulations).

In summary, HMRC’s submissions were that Adecco’s account was inconsistent with economic reality and there was a taxable supply from Adecco to the clients on which Adecco was liable to pay VAT on the full “consideration”.