The Court of Appeal upheld previous rulings that an employment agency, Adecco, was liable to pay VAT on the full value of supplies of temporary staffing services to clients, not just administrative fees. Adecco argued it only exerted limited control over temporary workers and was not their employer, but the Court found the contractual arrangements and services provided to clients were effectively the same regardless of worker classification. This clarifies that employment agencies must pay VAT on total fees charged for staffing services unless workers contract directly with clients. The decision impacts how agencies structure operations and could increase costs passed to clients.

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Case alert
Adecco UK Ltd & Ors
July 2018
Summary
The Court of Appeal has released its
judgment in Adecco UK Ltd & Ors
(Adecco). In dismissing Adecco’s
appeal the Court confirmed the
decisions of the First Tier Tribunal
(FTT) and Upper Tribunal (UT) that
Adecco’s supplies of temporary staff
under its ‘non-employment’ contract
arrangements were liable to VAT on
the full value of the supply by
Adecco to the client. Adecco
contended that it was liable to VAT
only to the extent of its
administrative and ancillary charges
to the client. In its view, any charges
relating directly to the costs of
paying temps were not liable to VAT.
Adecco’s supplies of the services of
‘employed’ temps and ‘self-
employed’ temps were not in
question. The dispute centred
around ‘non-employed’ temps. In the
case of ‘non-employed’ temps, the
Court determined that the extent of
control exerted by Adecco, the fact
that Adecco met the temp’s
PAYE/NIC and similar obligations
was significant. Further, the Court
found that there were no material
differences in contracts with clients
whether Adecco were placing
employed or non-employed temps,
such that the client would be
unaware of any distinction. Adecco
supplied the services of temps to
clients. Adecco’s appeal dismissed.
Court of Appeal
The Court of Appeal has released its judgment in the case involving Adecco and a number of
other employment bureaux (referred to as Adecco throughout). The appellants were all
employment bureaux operating similar business models supplying and placing temporary
staff. The Court confirmed the decisions of the FTT and the UT (albeit not agreeing entirely
with the rationale adopted by the FTT in reaching its decision).
Adecco operated three distinct contracting arrangements:
i) The ‘employment’ model. Temps were employed by Adecco under an explicit contract
of employment. Such supplies were treated as a single supply of services to clients and
were wholly standard rated.
ii) The ‘non-employment’ model. Adecco considered these contracts to fall short of
employment by Adecco and only its administrative, related ancillary costs and
commissions fell to be liable to VAT.
iii) The ‘self-employment’ model. Under this arrangement, temps entered into a separate
legal contract directly with the client. Adecco accounted for VAT only on its
administrative, ancillary and any commission fees.
Model ii) was the only contract at issue. Adecco argued inter alia, that it exercised insufficient
control over temps, provided no performance monitoring, allowed clients to select from a
range of temps and that temps were at liberty to accept or decline assignments and to take
on work with other agencies.
The Court determined that the contractual and economic reality was that Adecco made
supplies to its clients. The contracts between clients and Adecco were the same whether a
temp was ‘employed’ or ‘non-employed’ and a client would not, therefore, be able to
distinguish between the arrangements.
Comment – This decision is likely to be a disappointment to the employment bureau
sector since it upholds the decisions of the FTT and UT in HMRC’s favour rather than
applying the decision in Reed where the FTT determined VAT was only due on the
commission and ancillary services supplied by Reed. It is interesting that the Court
explicitly stated that the FTT in Reed had reached an incorrect decision. The Court
preferred instead HMRC’s stance that supplies of staff other than under a contract
between the temp and the client resulted in a supply of services by the bureau to the
client. The value of those services comprised the totality of the amount charged,
including any sums to cover temps’ wages, NI and other obligations.
Whilst any VAT chargeable should be able to be passed on to fully taxable, VAT
registered clients, the impact for those bureaux working in the welfare, charity,
financial services and similar sectors where clients may be unable to reclaim the VAT
charged may be considerable. Bureaux relying on Reed (as opposed to the HMRC
position stated in its Business Brief 32/11) may also now need to review their
arrangements.
Stuart Brodie
Scotland
T +44 (0)14 1223 0683
E stuart.brodie@uk.gt.com
Karen Robb
London & South East
T +44 (0)20 772 82556
E karen.robb@uk.gt.com
Vinny McCullagh
London & South East
T +44 (0)20 7383 5100
E vinny.mccullagh@uk.gt.com