Following the hearing in May 2015, the First-tier Tribunal (FTT) has now released its decision in the Adecco litigation concerning its claim for over-paid VAT on wages of non-employed temporary workers.

Unfortunately, Mosedale J has found against Adecco, however the CTG is hopeful that the litigation will be appealed to a higher court since the decision at the FTT is unexpected and contains some novel analysis of leading case law. This remains a significant issue for the sector and we recommend that charities continue to support this campaign until the litigation is ultimately resolved.  A summary of the key points arising from the case is set out below and confirmation of the appeal status will be made available as soon as the position is formalised.

The FTT helpfully accepted that Adecco had no control over the temporary workers; did no performance reviews and that any holiday leave was agreed with the client and Adecco.  These points supported Adecco’s view that VAT should only be accounted for on the commission element of Adecco’s charge.  However, on a contractual analysis, the FTT found that there was no legal contract between the temporary worker and Adecco’s client as:

• the client was liable to pay Adecco the full fee (wage and commission)
• the client was not liable to pay the temporary worker
• the temp owed a legal obligation to Adecco and not the client to carry out the assignment and
• Adecco owed the client the legal obligation to have the work carried out by the temporary worker.

The FTT went on to consider the economic reality of the supplies and Mosedale J’s analysis of the leading cases on multi-party contracts breaks new ground with her reconciliation of Redrow/LMUK/Tolsma/Baxi/WHA which is not supported by any higher case authorities either in the UK or at European level.  The key focus of the FTT’s reasoning was to identify who has the legal liability to pay for the services consumed, or as the FTT put it (paragraph 295), to examine “… whether the person who consumed the goods/services had the legal liability to pay for them”.

The FTT has come up with a “third way” which neither Adecco nor HMRC advanced (paragraph 219), and the reasoning applied is challenging to follow. The challenging interpretation is also compounded by the circular analysis that the FTT applies in seeking to reconcile the contractual position with its understanding of the economic reality to produce a result which taxes final “consumption” of the temp’s services.

The FTT accepts that the contractual position does not define the VAT analysis (i.e. that contracts are not determinative), and then says where the contracts are inconsistent with economic reality one can disregard the contracts to give the VAT answer.  In this case, the FTT finds the contracts are consistent with economic reality because this produces a result which taxes final consumption (i.e. the legal liability to pay for the services “consumed” lay with Adecco’s client) meaning that Adecco is required to account for VAT on the full amount charged to its clients.  In short, the FTT uses the contracts to answer the VAT analysis, effectively ignoring the economic reality which Adecco evidenced (paragraphs 300; 301; 302; 303; 304).

The fact that Adecco operated within a specific regulatory regime applicable to employment agencies did not alter the FTT’s analysis because (in their view) this is a subjective matter that does not affect the legal analysis – Adecco chose to put itself in to this position and so, because the contracts mirror the economic reality, Adecco is liable to pay VAT on the full amount under the contractual arrangements (paragraphs 83-86).

Finally, the FTT distinguished the earlier Reed decision by taking the view that ‘lack of mutuality’ and ‘lack of control’ which were the two defining points in deciding that Reed provided an introductory service are not relevant and not significant.  There does not appear to be a proper legal basis for arriving at a conclusion that the FTT needed to depart from the Reed case (paragraphs 189-199).

CTG will keep members up-to-date as soon as the next steps have been agreed formally.  Any members with questions regarding this litigation or their own claim position should contact Jane Curran or Nick Comer at Deloitte (jcurran@deloitte.co.uk, ncomer@deloitte.co.uk).