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VAT and Temporary Staff - Decision released but it's not good news

18th December 2015

The long awaited decision of the Tax Tribunal on VAT and temporary staff was finally released on 27 November, some six months after the case was heard, and unfortunately the news is not good.

The case dealt with self-employed temporary workers and the background goes back to 2003 and the introduction of the Conduct of Employment Agencies and Employment Businesses Regulations. Prior to these regulations HM Customs & Excise (as they still were in those days) accepted that if an employment agency introduced a temp to a client then VAT was due on the introductory commission, but they accepted that the agency could pay the temp on behalf of the client without VAT being chargeable on any amounts paid in respect of salary and NIC.

The Regulations were designed to give temp workers similar legal protection as employees and created what was akin to deemed employment status for the purposes of such things as equal entitlement to holiday, pay and the like. As a result of this Customs took the view that since the tempos were effectively employed by the agency it was making a supply of staff to its clients and VAT would be chargeable on the entirety of any payment received by it.

As a result of lobbying by both the Financial Services and Not-For-Profit sector who use significant numbers of temp staff Customs decided not to implement their changed policy until 2009 when they removed a concession which had kept the status quo with periods prior to 2003.

The next stage in the process was the decision of the First-tier Tax Tribunal in the case of Reed Employment. This case dealt with what was known as a “Fleming” claim which covered periods prior to 2009, and in the course of this case the Chairman made comments to the effect that the agency couldn’t really be said to be supplying staff since as soon as it introduced them it effectively ceded control and that the temps were only deemed to be employed for the regulatory reasons cited on its introduction, and not for any wider purpose.

HMRC chose not to appeal this decision and argued that as the case dealt with period’s pre 2009 it had no effect for periods after the withdrawal of the concession, so it was only a matter of time before that view was challenged.

The test case in the form of Adecco, and various related companies duly came before the Tribunal in May of this year, and the Judge has found for HMRC.

In a nutshell the Judge has cut through the question of whether or not the temps are employed and essentially said that this is not relevant. She found that from a contractual position, the client was liable to Adecco to pay the full contract fee in return for the work provided by the temp, and that Adecco was liable to pay the temp the agreed fee under the temp contract. There was no contract between the temp and the client.

From the point of view of economic reality, the temp agreed to carry out the client’s instructions during the period of assignment, and does not work under Adecco’s control, but that was not inconsistent with the legal liability to pay and the contractual position.

The judge did not find the question of control significant, since economic reality looked at who consumed the work of the temps, and it was clear that it was the clients, and they also had the obligation to pay Adecco for what they consumed.

Where does this leave us? As the judge herself said, it is an “unfortunate outcome in the sense that two tribunals have reached diametrically opposed conclusions on the same issue”, but she took consolation from the fact that the decision will no doubt be appealed to a higher authority.

This is one case which shows no sign of resolution in the short term.

For further advice or assistance please contact our VAT team

Phil Salmon

VAT Partner
Tel: +44 20 7969 5611