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Oct

servant of two masters? PUBLISHED IN VAT

I remember at school an amusing school performance of the famous play “Servant of Two Masters” in which the servant, Truffaldino, attempted to increase his income by serving two masters at the same time. The play demonstrated just how difficult (and potentially comical) this can be in practice.

 

In my VAT advisory career, I have often been reminded, perhaps without the humour, of the Truffaldino ordeal. It is a generally understood practice in VAT that, as long as an employee is jointly employed by two or more organisations, they may share the staff cost between them without VAT arising. Yet joint contracts of employment are frowned upon by employment lawyers for various reasons. Our clients are sometimes forced into joint contract arrangements by a quirk of VAT which holds that, whereas an employee providing service to an employer is not involved in an “economic activity” for VAT purposes, and therefore does not give rise to VAT, the moment the employer sells the exact same service of his employee to another party, it is an economic activity and is subject to VAT (with minor concessionary exclusions).
 
Such a state of affairs seems extremely unfair as between companies in a group, which may have good reason not to be group VAT registered. Joint contracts, for all their vices, come in handy when sharing staff across a group. In any case one can usually resolve the inherent problem of there being two masters for one servant by reference to the ultimate control of all of the group members being in the hands of one company.
 
Things become more complicated when two friendly but unrelated bodies, often charitable in nature, seek to share staffing costs in this manner. The legal difficulties with joint employment contracts then become more profound, and we do have a situation here where there are literally two masters. But as long as the employers co-operate properly in sharing their staff, there is no reason for the arrangement not to work. I have yet to come across any examples where HMRC have challenged this staff sharing, by two unrelated entities, as not being within the spirit of the usual treatment of joint employment contracts. But, this is subject to the proviso that there is a genuine sharing arrangement. It assumes that the employee in question will sometimes work on the affairs of one of the employers, and then switch to working on the affairs of the other. That is plainly different to a situation where he works entirely under the direction of one of them, but is used from time to time in the provision of services to the other. That particular distinction may often seem fairly clear and obvious, but the difficulty is that the dividing line between the two is apt to be smudgy. 
 
In any case, The UK ought to adopt the European VAT provision that allows for the sharing of such services between exempt bodies to be exempt as long as they involve no more than the recouping of the defrayed costs, and that is an issue that HMRC is currently investigating.
 
But problems undoubtedly do arise where joint employment contracts are used in an attempt to remove VAT from a situation where one of the employers is using the staff, under its own direction, to provide services to the other employer. In that situation, each individual Truffaldino is not really the servant of two masters, but rather the servant of one, albeit having a legal employment relationship with both. It is the party which controls him which could be seen to be supplying the services, albeit through him, to the other party that employs him. That is not the same as Truffaldino occasionally providing his time under the direction of one of his employers, and occasionally providing his time under the direction of the other. And, complicated reporting structures will not automatically erase the simple lines of responsibility as described above. 
 
This is the problem which bedevilled CGI (Europe) Limited in its recent tax tribunal defeat on just such an arrangement. CGI were an outsource IT company which took over the staff of an insurance company. But, the staff were put under joint employment contract between the insurance company and the IT company. That, so the IT company said, meant that the element of their fee which reflected the cost of the staff was outside the scope of VAT, because all they were doing was obtaining from the insurance company its share of the employment costs. But the tribunal was wholly convinced by HMRC’s argument to the effect that, realistically, the staff were under the control of CGI, and that CGI wrapped this element of its cost base together with other elements to provide the IT service. This meant that it did not really matter that Truffaldino was also employed by the insurance company, since the recharge of his costs was in respect of the work he performed for the IT company.
 
And so, unlike the case in the famous play, this Truffaldino was not, in operational terms, the chaotic servant of two unsuspecting masters, but rather the servant of just one, which is why the arrangement did not work.
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