The Upper Tribunal issued two judgments this week regarding VAT cases. In the first case, Adecco lost its appeal against HMRC in its battle over how VAT applies to the supply of temporary workers. The Tribunal found that Adecco makes a supply of workers to its clients and VAT is due on the full fees paid. In the second case, U-Drive lost its appeal against HMRC regarding reclaiming VAT on vehicle repairs, as the Tribunal found the economic reality was that the repair supply was made to the vehicle owners, not U-Drive. HMRC also issued two consultations this week proposing a "split payment" system for overseas online sellers and a reverse charge for supplies in the construction industry.

1. © 2017 Grant Thornton UK LLP. All rights reserved.
ITU
Summary
This week the Upper Tribunal
issued two judgments. The first
concerned Adecco and its battle
against HMRC in relation to the
supply of temporary workers.
Adecco claimed that it merely
provides an introduction service
for which it charges a
commission but HMRC contend
that it supplies workers to its
clients. From a VAT perspective,
this is an important distinction.
The Upper Tribunal has also
issued a judgment in the case of
U-Drive concerning whether the
taxpayer was entitled to reclaim
VAT it had incurred on the repair
of damaged vehicles. U-Drive
argued that it was the recipient
of the repair services and entitled
to claim. HMRC contend that
the repair service was to the car
owner and there was, thus, no
supply to U-Drive.
HMRC has also issued two
consultations this week.
24 March 2017
Upper Tribunal
The battle between suppliers of temporary workers and HMRC continued this week with
the release of the Upper Tribunal’s judgment in the case of Adecco (& Ors). The issue in
point is the nature of Adecco’s supply to its clients. Adecco argues that when it provides a
temporary worker to its client, it merely introduces the worker and that the consideration it
receives from its client for that supply is the commission it charges to its client. HMRC
contend that the consideration paid by the client not only includes the commission, but
also includes the wages, PAYE and National Insurance etc. In other words, the value of
Adecco’s supply of a temporary worker is equal to the total cost of hiring the worker.
Following the 2011 decision of the First-tier Tribunal (FTT) in the case of Reed
Employment Ltd (Reed), Adecco submitted similar claims for VAT it considered it had
overpaid on the supply of temporary workers. HMRC refused to repay those claims and
Adecco lodged an appeal to the FTT. The FTT found that, under the contract between
them, the client was obliged to pay Adecco for the work done by the non-employed temp
as well as for Adecco’s services and Adecco was obliged, under its contract with the temp,
to pay the temp for the work. At no time was there a contract between the temp and the
client. As such, the FTT considered that, contrary to its decision in Reed, the nature of
Adecco’s supply was that it supplied the services of the temp to the client and VAT was,
thus, due in relation to the whole of the consideration paid by the client to Adecco.
Adecco appealed to the Upper Tribunal. The starting point for the analysis of the nature of
a supply is the contractual position of the respective parties. Here, the Tribunal found that
there was no contract between the temp and the client and there was no contractual
obligation of the client to pay the temp. Indeed, the contracts clearly indicated that the
temp supplied services to Adecco which was obliged to pay the worker for the services
performed at the client. In summary, there were contracts between the non-employed
temps and Adecco and between Adecco and the clients. The temps agreed to perform each
assignment in return for payment by Adecco at an agreed hourly rate. Accordingly, the
Tribunal decided that Adecco made a supply of the provision of the non-employed temps
to the clients in return for the total fees paid by the clients. Appeal dismissed.
Comment – It is difficult to see where Adecco can go with this line of argument. It
is clear that both the FTT and Upper Tribunal consider that the nature of the
supply is determined solely by reference to the contractual position and obligations
owed between the three parties in this arrangement. The Tribunal also looked at
the economic reality and, essentially, came to the same conclusion that the client
received from and paid Adecco for the services of a temporary worker and VAT was
due on the full amount, not just on the commission paid.
Issue07/2017
Adecco loses VAT temporary workers
appeal
Indirect Tax Update

2. © 2017 Grant Thornton UK LLP. All rights reserved.
‘Grant Thornton’ refers to the brand under which the Grant Thornton member firms
provide assurance, tax and advisory services to their clients and/or refers to one or
more member firms, as the context requires.
Grant Thornton UK LLP is a member firm of Grant Thornton International Ltd (GTIL).
GTIL and the member firms are not a worldwide partnership. GTIL and each member
firm is a separate legal entity. Services are delivered by the member firms. GTIL does
not provide services to clients. GTIL and its member firms are not agents of, and do not
obligate, one another and are not liable for one another’s acts or omissions.
This publication has been prepared only as a guide. No responsibility can be accepted
by us for loss occasioned to any person acting or refraining from acting as a result of
any material in this publication.
grant-thornton.co.uk
GRT100456
U-Drive Ltd – VAT incurred on vehicle repairs
Upper Tribunal
On the same day as the judgment in Adecco was released, the Upper Tribunal also released its
judgment in this case. The case also involved tripartite arrangements. U-Drive Ltd is a car-hire
company. When customers were involved in collisions with third parties, the company offered the
third party owner the opportunity to have the vehicle repaired at the company's expense using an
approved repairer. The repairer charged VAT on these repairs and U-Drive claimed that VAT as
input tax. HMRC took the view that U-Drive did not receive the supply of repair services. It
contended that the repair service was provided by the repairer directly to the third party car owner.
As such, U-Drive was not entitled to reclaim the VAT charged.
U-Drive appealed to the FTT but the Tribunal agreed with HMRC’s position. The company
therefore appealed to the Upper Tribunal which, once again, found in HMRC’s favour. Here, whilst
there was clearly a contract in place between U-Drive and the repairers, the economic reality was that
the supply of repair services was, in fact, made directly to the car owner. U-Drive’s payment of the
cost of the repair was made merely to indemnify its customer which had a liability to compensate the
third party car owner for the damage they had caused to the owner’s vehicle. As the supply of repair
services was made to the car owner, U-Drive was not entitled to reclaim the VAT charged to it by the
vehicle repairer.
Comment
This is another case
where the Tribunal has
needed to consider
both the contractual
relationships between
the parties and the
economic reality of
those relationships and
obligations.
Here, whilst there were
contracts in place, the
economic reality was
different to the
contractual position. In
such cases, it is that
economic reality that
determines the VAT
position.HMRC consultations
Comment
Businesses that operate
online trading
platforms will be
affected severely by the
‘split payment’
proposals should they
proceed.
Businesses operating in
the construction
industry will also be
affected by the ‘reverse
charge’ proposals,
albeit that the nature of
the reverse charge
(where VAT is declared
and reclaimed on the
same VAT return) may
help such businesses
cash flow.
Calls for evidence
This week saw the announcement of a number of consultations. From a VAT perspective, the first
consultation is in respect of the proposal to introduce a split payment system of collecting VAT due
from overseas suppliers who sell goods in the UK using online marketplaces such as Amazon and
EBay. The proposal is to establish a VAT collection system which ensures that VAT payable is
collected at the point of sale and transmitted directly to HMRC with the net of VAT amount being
transmitted directly to the seller. The proposal is intended to deal with the high level of non-
compliance by overseas suppliers with a view to creating a level playing field for UK based suppliers.
The second consultation is in respect of supplies of labour within the construction industry. HMRC
considers that there is a threat to the Revenue where labour is supplied in the construction industry
and the supplier fails to account for the VAT charged on the supply. The proposal here is to make
such supplies subject to a reverse charge whereby the customer is made legally responsible for
accounting for the supplier’s VAT. This way, the supplier cannot collect VAT from their customer
and then disappear without accounting for the VAT to HMRC. Such a reverse charge was introduced
to combat similar problems of fraud in the telecoms / mobile phone sectors.
The ‘split payment’ consultation ends on 30 June 2017. The ‘reverse charge’ consultation ends on 9
June 2017. Businesses affected by these proposals are invited by HMRC to contribute to the
consultation process.
Contact
Stuart Brodie Scotland stuart.brodie@uk.gt.com (0)14 1223 0683
Karen Robb London & South East karen.robb@uk.gt.com (0)20 772 82556
Vinny
McCullagh
London & South East vinny.mccullagh@uk.gt.com (0)20 7383 5100