A long-awaited judgment of the First-Tier Tax Tribunal (Adecco v HMRC) has just been released. Adecco has lost this round of its Deloitte-backed case against HMRC, in which Adecco argued that it should only have to charge VAT on margin rather than on the full cost of staffing supply.
Until 2009 staffing companies were allowed to choose just to charge VAT on their margin. HMRC then withdrew the Staff Hire Concession (SHC) (which had been the basis on which staffing companies were given this choice), and from then expected staffing companies to charge VAT on the full amount of what they charged clients. This made staffing supplies more expensive for banks, insurers, some educational establishments, charities and healthcare providers (none of whom can recover the VAT which staffing companies charge them).
Reed Employment was successful in a First-Tier Tribunal case on similar facts (albeit for a period which went back to before the removal of the SHC) which was decided in 2011.
This led Deloitte to back Adecco in an attempt to overturn the withdrawal of the SHC, and get VAT refunds for Adecco which Adecco would then be able to pass back to its banking and other relevant clients. The basis of the argument was complicated and has been covered in previous briefings. Effectively Adecco had argued (amongst other things) that “really” temps supply their services to the client because Adecco has no control over the temps on assignment. This meant that, so far as Adecco was concerned, the only thing Adecco supplied was an introductory service and it is on that that VAT should be charged. The temps would not need to charge VAT at all because they would be under the VAT threshold.
But the Tribunal has now decided that VAT should be charged on the full cost of supply. The reasons are complex but the Tribunal places a lot of importance on who was entitled to be paid by whom. Broadly, the Tribunal found that the temps agreed with the staffing company to do work for the hirer and that this agreement was a supply by the temp to the staffing agency for which the agency paid. The hirer only paid the staffing company and had no obligation to pay the worker, so whilst the hirer benefited from the temps work, the temps could not be treated as supplying their services to the hirer. Therefore, the only supply to the hirer was by the staffing company and this included the cost of the introduction and the cost of the temp’s time.
Importantly the judge held that the earlier Reed Employment case was incorrectly decided and so felt unable to follow that decision.
Adecco seems likely to appeal, not least because of the Reed Employment case having gone the other way. The judge noted that it was an “unfortunate outcome…that two tribunals have reached diametrically opposed conclusions on the same issue.” The judge further stated that she was “consoled by the fact that that my decision, at least, will no doubt be appealed and a higher authority will clarify the VAT obligations of an employment bureaux”.
We wait to see how HMRC will deal with claims which have been made for recovery of VAT now that the Adecco judgment has been released. Previous briefings set out the need for protective claims to be made to protect potential VAT recovery for periods longer than four years ago. Of course, the staffing companies themselves have no VAT loss from the above but may be encouraged to claim by their clients (with VAT exempt businesses) who do suffer the VAT burden, and making a VAT protective claim may still be a prudent course of action if an appeal is lodged.