Blog: Adecco UK Ltd & Others v HMRC

Day 3

Day 3 at the Royal Courts of Justice started with HMRC summing up their case by asking us to imagine the scales of economic reality weighted in their favour, primarily owing to the contracts being between the temporary worker/Adecco and Adecco/their client, and there being no implied or express contract between the temporary worker and the client.  So the temporary worker supplies work to Adecco and Adecco carries out their client’s instructions for the full consideration of £10.

The importance to be placed on the contracts should be determined by their weight; Adecco’s contractual obligations were more than mere payment obligations (as in the case of WHA Ltd) and included various rights and obligations such as  Adecco’s right to termination.

The fact that the client, rather than Adecco, regularly ended an assignment was not a relevant factor, as Adecco would have no interest in ending an assignment that worked for the client. Holidays had to be agreed by the temporary worker with Adecco, in practice this was agreed between the client and the temporary worker. But if a temporary worker arranged a holiday that was inconvenient to the client; Adecco had the right to terminate for breach of contract.

Adecco then set out their headline points: the judges would go wrong if they failed to focus on the tripartite arrangement. Rather than focussing on the Adecco/client contract; you had to look at it in the round to avoid the alluring simple analysis of Adecco receiving £10 as principal by reference to the Adecco/client contract.

There was discussion of the relevance of the Conduct of Employment Agencies and Employment Businesses Regulations 2003.  The Conduct Regs wouldn’t allow Adecco to pay the temporary workers without constituting itself as an Employment Business.  The contracts are consistent with the regulatory restraints.  Adecco’s termination clause flows from the Conduct Regs and should be viewed through that prism.  The purpose of the contracts is to protect Adecco because of the statutory position of having to uphold the payment model. This is why Judge Berner in Reed characterised payment as a reimbursement. The contracts are not inconsistent with Adecco’s analysis taking on board the circumstances and the economic reality.

Because of the Conduct Regs, Adecco must provide their introduction and payment services as principal. But the VAT supply must be determined by what the supply is and who is making the supply. The regulatory conditions do not guide the VAT position.

We will have to wait to see what weight the Judges will give to the contractual arrangements within the all-encompassing ‘economic reality’ of how the contracts were drawn up in light of the regulatory framework.

In summary, Adecco’s case was robustly argued but HMRC’s submission had the benefit of simplicity in a complex area of law.

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Day 2

Day 2 at the Royal Courts of Justice started with Adecco finalising their submissions from day 1. This included references to the ECJ case involving Loyalty Management UK and Baxi Group which concerned third party consideration where there was no need for a contract or direct payment.  There was also reference to the mother of all FTT cases in this area of dispute involving Reed Employment Limited, where Judge Berner found that Reed was in fact providing introductory and payment services rather than temporary staff, in circumstances virtually the same as Adecco.

Whereas day 1 the focus was on the nature of the supply, today was all about the numbers. It was HMRC’s turn to put their case forward.

HMRC’s case centred around how much money Adecco received? Was it, (in the example used) the full £10 from the client, or was it £2 (for introductory services), with the remaining £8 being handed over to the temporary worker?  HMRC’s contention is that it doesn’t matter what you call the supply, whether it is ‘introductory and payment services’, or whether it is for the ‘supply of a temp’; HMRC acknowledged that if the agreement was for the supply of a temporary worker the full £10 value would make more sense.  However, even if this is not the case, an agreement to provide introductory and payment services for £10 would create the same result, i.e. so long as Adecco receives the full £10 it will account for VAT on the £10.  Without such a result, the remaining £8 would only be subject to VAT in the hands of the temporary worker if their turnover required them to be VAT registered.  For instance, in the example provided by one of the judges, ‘if you were a high powered P.A.’ and had reached the threshold for registration.

HMRC also homed in on the commercial reality of the case, why would Adecco agree to pay the temporary worker £8 whether or not they received payment from the client for the sum of £2?

HMRC stated that the contracts supported their theory of the economic reality, i.e. that the temporary worker contracted with Adecco and Adecco contracted with the client. There is a massive benefit to the client, in having Adecco fulfil PAYE and NIC obligations.  Furthermore, contracts between the temp and Adecco provided Adecco with termination rights. This all points towards a contract between Adecco and the client for the supply of the worker for the full consideration rather than merely an introductory and payment service.

The issue of control was a non sequitur, the client may control the performance of the temporary worker on a daily basis, but only because the temporary worker agrees with Adecco to carry out the clients’ instructions.

HMRC finish their submission tomorrow.

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Day 1

Yesterday in the Royal Courts of Justice, Adecco presented their submission in their appeal against the First tier Tribunal (FTT) decision of 2015 that found in favour of HMRC and ruled that Adecco was not providing introductory services, rather it was acting as principal in providing temporary staff.

The central tenet of their case was that ‘supply’ as outlined in a contract is not always the same as a supply for VAT purposes. The FTT was incorrect to focus on the contractual position. The nature of the supply is the question, VAT can only be determined by reference to all of the facts, particularly with tripartite agreements, where the question of what is supplied can be complex.

‘Economic reality’ resounded around the court room. Definitions of what the term meant were dredged from case law ranging from the Supreme Court case of ‘Loyalty Management UK’, Redrow and Airtours, to establish that there are no universal laws, rather it depends on the facts of a case.

The fact that there was no contract between the temporary workers and the client did not prevent a reciprocal relationship established by the contractual framework that Adecco put in place with its contractual agreements between itself and the client and itself and the temporary workers.

Published: 12.06.16 - Posted In: Uncategorized