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You are here: BAILII >> Databases >> First-tier Tribunal (Tax) >> Reed Employment Ltd v Revenue & Customs [2011] UKFTT 200 (TC) (24 March 2011) URL: https://www.bailii.org/uk/cases/UKFTT/TC/2011/TC01069.html Cite as: [2011] UKFTT 200 (TC), [2011] STI 1500, [2011] SFTD 720 |
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[2011] UKFTT 200 (TC)
TC01069
Appeal number: LON/2004/0130,
TC/2009/14542 and TC/2009/15468
Value
added tax (VAT) – whether supplies by an employment
bureau in respect of
temporary workers were of introductory services or supplies of staff – consideration
for such supplies - jurisdiction of tribunal to determine nature of a claim and
whether a later demand was an amendment of an earlier claim – whether HMRC can
rely on a defence of unjust enrichment in relation to claims made after 26 May
2005
FIRST-TIER TRIBUNAL
TAX
REED
EMPLOYMENT
LIMITED Appellant
- and -
TRIBUNAL: JUDGE ROGER BERNER
DR CAROLINE SMALL (Member)
Sitting in public at 45 Bedford Square, London WC1 on 7 – 10 February 2011
Jonathan Peacock QC and John Brinsmead-Stockham, instructed by Slaughter and May, for the Appellant
Philippa Whipple QC and Richard Smith, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents
© CROWN COPYRIGHT 2011
DECISION
1. This
is a series of appeals by the well-known recruitment business, Reed Employment
Limited (“
Reed
”). Each appeal is against decisions of the Commissioners for
HM Revenue and Customs (“HMRC”) to refuse to allow a claim, for what is said to
be overdeclared value added tax (“VAT”), under s 80 of the Value Added Tax Act
1994 (“VATA”).
2. The
background to these appeals is that throughout the relevant period Reed
carried
on the recruitment business and was the representative member of its VAT
group. During the whole of that period the business operated both in the
permanent and temporary job markets. These appeals are solely concerned with
Reed
’s VAT treatment in respect of its placement of temp workers.
3. In
broad outline, Reed
’s business in the temp job market consisted of introducing temp
workers to clients who were looking to fill temporary job vacancies. If a
client hired a temp worker through
Reed
, then
Reed
would issue a weekly invoice
to the client in respect of that worker. The amount invoiced would be arrived
at by multiplying the hourly charge rate (agreed between
Reed
and the client)
by the number of hours worked by the temp worker during the week. The hourly
charge rate was calculated as the aggregate of an amount in respect of the temp
worker’s services and
Reed
’s commission.
4. Apart
from its healthcare division (which included Reed
Nurse), in respect of which
Reed
had at all times accounted for output tax on its commission alone, for the
remainder of its temp business
Reed
accounted for output tax on the whole of
its receipts from its clients. In August 1993 the former VAT and Duties
Tribunal decided in
Reed
Personnel Services Limited v Customs and Excise
Commissioners that the correct treatment of
Reed
Nurse was that VAT should
be accounted for on the commission alone. That decision was upheld on appeal
to the High Court (see [1995] STC 588).
5. In
light of the Reed
Nurse decision
Reed
sought, in consultation with HMRC, to
ensure that the same VAT treatment (that of accounting for output tax on the
commission element only) was also applied prospectively to its non-nursing
business.
Reed
also sought to obtain repayment from HMRC of output tax that it
claimed it had previously overpaid. In this respect it sought to issue credit
notes in respect of such overpaid VAT to any of its clients that requested
them.
6. On
18 July 1996, whilst Reed
and HMRC were in correspondence concerning the credit
notes, the government imposed the three-year cap on claims for overpaid VAT
(“the three-year cap”). Following the imposition of the three-year cap,
Reed
,
with the agreement of HMRC, issued credit notes to its clients in respect of
the period 3 November 1993 – 31 December 1996 (“the 1993-96 repayments”).
Reed
provided HMRC with lists of the credit notes that it had issued and HMRC
allowed
Reed
credit (through its normal VAT returns) for all the overpaid
output tax claimed in this manner. The 1993-1996 repayments amounted to a
total repayment of £607,352 of overpaid output tax. In practice, the only
clients who sought refunds in this manner were those whose supplies were fully
or partially exempt or who were not registered for VAT and who could not
recover their own output tax in full (“the irrecoverable sector”).
7. In
addition, on 15 January 1997, Reed
made a protective claim for a repayment of
the output tax that it had overpaid in the period 1 February 1991 to 27 October
1993. This claim also related to supplies made to clients in the irrecoverable
sector.
8. Following
the decision of the Court of Justice (“ECJ”) in Marks and Spencer v Customs
and Excise Commissioners [2002] STC 1036 (“Marks and Spencer 1”)
(which held that the three-year cap was in breach of EC law), HMRC accepted Reed
’s
claim on 27 January 2003, subject to confirmation that
Reed
would not be
unjustly enriched by repayment of that sum.
Reed
confirmed that it would not
be unjustly enriched, on the basis that it intended to issue credit notes to
its clients, as it had done in respect of the 1993-96 repayments. On that
basis, HMRC made a repayment of VAT to
Reed
in May 2003 in the amount of
£1,471,952 plus statutory interest (“the 1991-93 repayments”)
9. Reed
also sought to recover the output tax which it considered that it had overpaid
in respect of supplies to the irrecoverable sector, dating back to 1 April 1973
and the introduction of VAT.
Reed
made a claim on 17 June 2003 to recover such
overpaid output tax for the period 1 April 1973 – 31 December 1990 (“the 2003
Claim”). The claim was in the amount of £4,083,071 plus statutory interest.
HMRC refused this claim, and
Reed
appealed. This is the first appeal with which
we are concerned. The amount at issue (which the parties have agreed we do not
need to determine at this stage) is now £3,945,734.52 plus statutory interest.
10. Following the
judgment of the ECJ in Marks and Spencer plc v Customs and Excise
Commissioners [2008] STC 1408 (“Marks and Spencer 2”) and the decision
of the House of Lords in that case and in Fleming v Revenue and Customs Commissioners
[2008] STC 324, on 27 March 2009 Reed
demanded the repayment of two further
amounts of overpaid output tax, in respect of supplies to clients who were able
to recover output tax in full (“the recoverable sector”). The first of these
demands was made by what
Reed
claims was an amendment to the 2003 Claim. This
forms part of the dispute between the parties. We shall therefore refer to
this as “the 2009 Demand”. The 2009 Demand related to the period 1 April 1973
to 31 December 1990 and was for £63,868,033 plus statutory interest. The
Appellant’s second appeal is against HMRC’s refusal of the claim made by the
2009 Demand. The second demand (“the 2009 Claim”) related to the period 1
January 1991 – 31 January 1996 and was for £75,854,485.52 plus statutory
interest. The 2009 Claim was also rejected and the third appeal is against
that decision. (The 2009 Claim was in the event not pursued by the Appellant
beyond 2 July 1995 and HMRC have accepted the claim from 1 January 1995, so the
third appeal now relates only to the period 1 January 1991 – 31 December 1994.)
(1) Whether the Appellant’s supplies, at all material times, were limited to the introduction of workers to its clients in return for an introduction fee (as the Appellant contended) or whether (as contended by HMRC) the Appellant was making, as principal, a supply of temporary staff, the consideration for which was the whole amount charged to the client.
(2) As regards the 2003 Claim for the repayment of VAT overpaid on its introduction of workers to clients in the irrecoverable sector:
(a) Whether the Tribunal has jurisdiction to determine if the request for repayment (which we have described as the 2009 Demand) in relation to the introduction of workers to the recoverable sector in the period 1973-1990, was an amendment to the 2003 Claim (as the Appellant contended) or whether that question falls outside the Tribunal’s jurisdiction (as HMRC contended); and
(b) If the Tribunal were to decide that it has jurisdiction to determine the question set out at (a) above, then whether the 2009 Demand should proceed as an amendment to the 2003 Claim (as the Appellant contended), or whether it should proceed as a new claim (as HMRC contended).
(3)
If the Appellant succeeds on issue (1) above, then with regard to the
2009 Claim, whether HMRC can rely upon the defence of unjust enrichment in
relation to the 2009 Claim. If HMRC succeed on issue (2)(a) or (b) above, this
issue also arises in relation to the 2009 Demand. We are not asked at this
stage to determine if Reed
would be unjustly enriched.
12. We had witness
statements from two witnesses for Reed
who also gave oral evidence. The first
was from Derek Beal, a director of
Reed
and the finance director for the
Reed
group of companies. Mr Beal joined
Reed
on 1 April 1989 as managing director,
and became group finance director in April 1990. The second witness was Tracie
Bates who had three separate periods of
employment
with the
Reed
group between
1979 and early 1995, as a branch level member of staff, from 1985 as a branch
manager. In 1995 Miss Bates moved to head office and rose to operations
director before leaving
Reed
in 2005 to start her own business.
Reed
is one of
her clients. We were also shown a number of bundles of documents.
13. From all this material, much of which was uncontroversial, we find the following material facts.
14. Since 1960, when
the business was first established, Reed
has been operating as an
employment
agency. That, we should emphasise, is not used here in any technical sense
(the question of whether
Reed
was acting as principal or agent, and the effect
if any of that analysis is at issue in these proceedings), but as a general
description of the business. We could equally describe it as an
employment
bureau, or as a recruitment business, to adopt similarly neutral terms.
15. Reed
has at all times
operated both in the permanent and temporary fields. Although these appeals
are not concerned with the permanent side of the business, we heard, and we
accept, that this involves, in outline,
Reed
identifying, and introducing to a
client, a suitable individual (or individuals) to fill a permanent position
that had arisen, or was about to arise, in a client’s business. Generally, the
client would pay
Reed
a one-off commission in the form of an “introduction
fee”, typically calculated as a percentage of the individual’s first starting
salary. Where the client did not hire an individual introduced by
Reed
, the
client would not be liable for the fee. If an individual was hired, and the
employment
terminated within a given period, part of the fee would be rebated.
16. As regards
Reed
’s service in respect of temp workers, a temp consultant within a
Reed
branch
aims to find and introduce to a client temp workers who meet the criteria
specified by the client. Unlike the permanent placements no contract of
employment
or otherwise is entered into between the client and the temp
worker. The payment structure for temp workers is also necessarily different
from that which operates on the permanent side of the business. Instead of a
one-off fee, clients pay for the services of a temp worker on an hourly basis.
The client is liable to pay
Reed
a weekly sum in respect of each temp worker it
has engaged through
Reed
. This sum is arrived at by multiplying the number of
hours that the temp worker has worked for the client by the hourly charge rate
specified in the contract between
Reed
and the client.
17. The charge rate
that was negotiated by Reed
in each case included
Reed
’s commission in respect
of its service of finding and introducing the temp worker.
Reed
’s commission
was the difference (or “margin”) between the temp worker’s hourly gross pay
rate (plus national insurance contributions paid by the client) and the charge
rate.
18. We had
considerable evidence, particularly from Miss Bates, as to the process of
consultants bringing temps onto Reed
’s books, negotiating charge rates to
maximise
Reed
’s commission (on the basis of which the consultants themselves
would be substantially remunerated) and matching temp workers to clients. This
process included registration, including an interview and testing, and the
taking of references. Various means were employed to ensure that the temp
worker would be placed by
Reed
and not another
employment
agency, such as
seeking to ensure that the temp worker kept in contact with
Reed
in case of
sickness, and asking temp workers to come into a branch on Monday morning for
training, or simply on paid “waiting time” so as to have them available in case
of any emergency vacancies. The costs of any temp workers not introduced to
clients in this way would be borne by the branch as overhead expense.
19. On a temp worker
being proposed to a client, there would then be a discussion with the client
regarding Reed
’s proposed charge rate. The typical contract did not identify
any separate elements of the charge rate, such as the wages of the temp worker
and
Reed
’s commission. However, we heard, and we accept, that local market
rates of pay for any particular type of temp worker were relatively
well-defined. Temp workers would quickly get to know what pay rate
Reed
and
other agencies were offering. This led to some consistency of local pay rates,
subject to any particular agency undertaking a marketing drive, when higher
rates might be offered for a short period.
20. The local pay
rate would be the starting point in the calculation of the charge rate. The
consultant would generally determine how much commission would be added to produce
the charge rate to be suggested to the client. This was an ad hoc negotiation
as part of the introduction process. It was no part of a consultant’s
obligation to inform the client of the amount of the commission. Some
engagements would require negotiation, including discussion of commission;
others, particularly if in an emergency, might not. However, some (but not
all) clients would in practice have a good feel for both the local pay rates
and the level of uplift on local pay rates which they had to pay to Reed
and
its competitor agencies for their services, and if
Reed
was proposing charge
rates which were too high the client would simply engage a temp worker from
another agency. Furthermore, if clients asked the question,
Reed
would tell
them the rate of commission.
21. Although the
typical charge rate did not identify the elements that had formed part of its
calculation, and within Reed
’s branches there were no set formulae for how the
level of commission should be determined, that was not the case for certain
agreements (“national agreements”) that were entered into between
Reed
and
certain large businesses which were frequent users of temp workers. This was a
trend that gathered pace during the recession of the early 1990s, and was
driven by a desire on the part of those businesses to engage in economies of
scale to enter into agreements with a few preferred suppliers and reduce the
cost of engaging the temp workers. There were some national agreements in
place by the end of 1993, but these were limited in number.
22. We were shown a
copy of a national agreement between Reed
and a substantial business client
operating in various locations in the UK. The pricing under this contract was
based on an agreed set of local pay rates which varied according to the
particular business locations of the client, to which there was applied a
multiplier (of 1.40 in this case) so as to arrive at the charge rate. The pay
rate was a gross amount, and was thus inclusive of income tax and national
insurance. All other amounts that might become payable to the temp worker were
taken into account in the calculation of the multiplier or uplift. This would
include, as we heard, a loyalty bonus (to which about 85% of temp workers were
entitled) and also any amount that would become payable by
Reed
to the temp
worker if the temp were sent back by the client. Other costs, such a luncheon
vouchers, free training, contributions to a profit-related pool, and statutory
sick pay and maternity pay, would be absorbed by
Reed
out of its own profits.
23. The national
agreements did not stand on their own; they were subject to the applicable
terms and conditions of business we shall explore later. They were essentially
a more transparent pricing structure under which Reed
’s commission (subject to
it having the financial liabilities to the employee we have mentioned) was
visible to the client in a way which was not apparent on its face in relation
to ordinary ad hoc arrangements (although we accept that in practice there was
some degree of de facto transparency even in those cases).
24. Even after
agreement of the charge rate, Reed
did not guarantee the assignment itself or
its length. The assignment could be brought to an end by the client at any
time and without any reason.
Reed
did not have any control over the client in
this respect. The temp worker would be told whom at the client to report to,
generally the person who was to be responsible for the supervision and control
of the temp worker during the assignment. Although the consultant would
maintain a dialogue with the client to ensure that everything was satisfactory,
to resolve issues, or to seek a re-booking of the temp worker for a further
period, neither the consultant nor
Reed
had any involvement in the temp
worker’s day-to-day work for the client. The temp worker was under the
direction, control and supervision of the client throughout the working day.
25. Reed
was
registered at all material times under the
Employment
Agencies Act 1973, both
as an “
employment
agency” and as an “
employment
business”. We shall look more
closely at the regulatory regime a little later. In placing permanent
employees,
Reed
regarded itself as an
employment
agency. In placing temp
workers it operated sometimes as an
employment
business and sometimes as an
employment
agency. The difference, we find, is that normally
Reed
would have a
temp registered on its books and in respect of the introduction of that temp to
a client would operate as an
employment
business. In certain cases, however,
Reed
might introduce a temp to a client purely on an agency basis, with the
client then dealing directly thereafter with the temp; this introduction would
then be on an agency basis. Mr Beal in his evidence, which we accept, gave as
an example (which he explained was unusual) of certain arrangements with Royal
Mail who regularly use casual workers, and for whom
Reed
might supply
individuals who would engage directly with Royal Mail, and for whom
Reed
would
have no payment obligations.
26. Reed
found it
beneficial to operate sub-brands in different markets.
Reed
itself (that is,
Reed Employment
) was synonymous with providing temp workers in the secretarial
and office sectors. When
Reed
decided to start providing temp workers in the
catering market, for example, it established a new sub-brand for those
activities – the
Reed
Industrial & Catering branch. Other sub-brands in
the relevant period included
Reed
Healthcare, which included within it
Reed
Nurse and
Reed
Paramedics,
Reed
Accounting, including
Reed
Accountancy and
Reed
Computing, and
Reed
TIC which, along with
Reed
Industrial & Catering,
included
Reed
Technical. Despite the different branding used by
Reed
in its
efforts to gain a foothold in different markets, the way in which the business
operated, and what it provided to its clients was the same across each of
Reed
’s divisions. Furthermore, the business operated in broadly the same way
during the whole of the period now relevant to these appeals.
27. There were,
however, certain differences in the way in which the business model operated
for Reed
Nurse, and for healthcare clients in the NHS. Firstly,
Reed
Nurse was
required to be registered under the Nurses Agencies Act 1957 (as amended) and
not under the
Employment
Agencies Act 1973. Secondly, the pay of nurses supplied
by a registered agency was controlled by national guidelines then in force
called the “Whitley Council rates”, and the separation of the commission
element from the scaled pay was prescribed. In his evidence Mr Beal confirmed,
and we accept, that
Reed
’s commission was identified in its invoices to NHS
healthcare clients. Except to the extent provided in the national agreements,
it was not so identified in any other area of its business.
28. As a matter of
accounting it is accepted, and we find, that at all material times Reed
accounted for turnover in its statutory accounts on the basis that it included
all of the sums it received from its clients. Turnover was therefore recorded
gross and comprised the whole of the aggregate charges made, and not simply the
commission element. This was the case both for the healthcare business and the
non-healthcare business. Mr Beal explained, and we accept, that this was
normal practice throughout the industry. It would have been invidious for
Reed
to have accounted differently from the method adopted by its competitors.
Furthermore, particularly at the time when the business was floated on The
Stock Exchange in 1971, there were commercial reasons for presenting the
turnover of the business as being as large as possible. That commercial
consideration continues to apply.
29. By contrast, the
management accounts of Reed
’s business were prepared by reference to
commissions in all areas of its business. In these accounts the charge rate
paid by clients was not recorded; nor were the pay rates of the temp workers or
national insurance or PAYE contributions paid by
Reed
in this respect. The
focus was on the commission earned by
Reed
during the relevant month (that is,
the charge rate less the temp worker’s pay and employer’s national insurance)
in order to present an accurate picture of the true profitability of the
business.
30. At all material
times Reed
operated a PAYE system and deducted income tax when making wage
payments to temp workers, even when that was not required – because the temp
workers were not employees of
Reed
– until the law was changed in the Finance
(No 2) Act 1975. The use of the PAYE system to collect national insurance
contributions from agency workers was provided for by the Social Security Act
1973, and by regulations introduced in 1974.
31. During the
period at issue in this appeal (1 April 1973 to 31 December 1993) Reed
operated
with terms of business between itself and its clients and conditions of work
between itself and the temp workers. These mutated over time, and we were
shown examples of the various versions. We focus first on the terms of
business with clients.
32. During this
period two versions of Reed
’s terms of business with its clients were in operation.
The first, dating from 1 July 1980, contained the following material
provisions:
“1. Except for drivers … all temporaries supplied are our employees unless otherwise stated in writing. We deduct P.A.Y.E. Income Tax and National Insurance Contributions from their remuneration and account to the Inland Revenue for these deductions.
2. By asking us to introduce a temporary to you, you are deemed to have accepted these terms of business.
…
8. All accounts are payable immediately on receipt
of the invoice and payment should be made to Reed Employment
Limited … (this
requirement is necessary since the major proportion of the charge is in respect
of wages already paid out) …”
33. We have referred
above to the fact that, even before it became obligatory to do so, Reed
operated a PAYE system to deduct both tax and national insurance from a temp
worker’s wages. The 1980 version of the terms and conditions asserted, in
addition, that the temp workers were
Reed
’s employees. However, our attention
was drawn to a decision of the industrial tribunal in Harris v
Reed
Employment
Limited and another (Case no 25575/83/LS), in which, on a
rehearing following referral from the
Employment
Appeal Tribunal, it was held
that in the period January 1979 to June 1983 Mr Harris, who was a temp worker,
was not an employee of
Reed
for the purposes of the
Employment
Protection
(Consolidation) Act 1978. The conditions of work between
Reed
and Mr Harris
were those which operated in the period 1973 to 1985, overlapping to an extent
with the terms of business set out above. From this, therefore, we conclude
that, notwithstanding the reference in the terms of business to a temp worker
being an employee of
Reed
, that was not in fact at any material time the case.
34. In the version
of the terms of business applicable from June 1985, the reference to the
employment
status of the temp worker was removed, and instead the conditions
provided:
“All temporaries (other than drivers …) supplied are
self-employed under a contract for services, unless otherwise stated in
writing. Reed
are required by law to deduct P.A.Y.E Income Tax and National
Insurance Contributions from their remuneration and account to the relevant
authorities for these deductions.
Charges made for the use of a temporary will be in accordance with the scale of charges/hourly rate prevailing at the time of the assignment, plus V.A.T. All such charges are inclusive of statutory deductions but exclusive of any travelling or other expenses where appropriate and agreed with the client.”
35. Provision was
also made for the payment of overtime and shift premiums. The overtime
provision for office staff was expressed as a premium of 50% of the hours
worked, or 1½ times Reed
’s standard rate. In common with the July 1980 terms,
there was also included provision to the effect that by asking
Reed
to
introduce a temp worker the client was accepting the terms of business.
36. New terms of
business were introduced from 1 August 1989. These contained similar provision
for the temp workers to be self-employed and for the client to have been deemed
to accept the terms on asking for a temp worker to be introduced. This was,
however, extended to include the provision by Reed
of any details of a
candidate for temporary
employment
. We were also shown a particular set of
terms of business for
Reed
Accountancy from August 1989, but nothing material
arises from those.
38. The terms of
business that took effect from 1 January 1994 made a number of material changes
to the terms we have described. For the first time in this context it was
provided that Reed
was acting as agent for the temp worker:
“Reed
acts as agent for the temporary.
Reed
’s
responsibilities to the Client are to verify references and qualifications and
to select a temporary suitable for introduction to the Client in accordance
with the Client’s requirements as to skills and experience as notified to
Reed
at the time of the booking.”
39. In addition, a
change was made to the way in which the charge to the client was expressed.
Unlike previous terms, these new terms set out the composition of the charge
made by Reed
:
“The charge made on behalf of the temporary for his/her services will be in accordance with the scale of charges advised to the Client at the time of booking. The charge will consist of the amount payable to or on behalf of the temporary, commission, any expenses to be reimbursed, VAT on the commission and where appropriate employer’s National Insurance contributions.”
40. We now turn to
the conditions of work as between Reed
and the temp workers. Throughout the
relevant period each of the conditions of work, apart from the conditions for
Reed
Nurse, appeared on the reverse of the time sheet required to be completed
by the temp worker and included the following introduction:
“In accordance with Regulation 9(6) of Statutory
Instrument Number 715[1]
made under the Employment
Agencies Act 1973 the Conditions below together with
the details of your assignment on the front of this copy contain full details
of the Terms and Conditions for your assignment.”
Reed
was described as the “
Employment
Business”.
“The Employment
Business agree to offer to the
Temporary Worker opportunities to work in the capacity specified on the
Temporary workers [sic] copy of the Timesheet, where there is a suitable
assignment with a Client for the supply of such work.”
“The Temporary Worker is under no obligation to
accept such [1985: an] offer but if accepted, he/she owes to the Employment
Business [1985: shall be deemed to have accepted] the normal common law duties
of an employee as far as they are reasonably applicable.”
43. For periods up
to 1 January 1994, the following undertakings were given by the temp worker to
Reed
, operative only when services were due to a client, in other words only
after the temp worker had accepted a work opportunity:
“(a) Not to engage in any conduct detrimental to the
interests of the Employment
Business.
(b) To be present during the times, or for the total
number of hours during each day and/or week as are required by the Client and
the Employment
Business.
(c) To take all reasonable steps to safeguard his/her own safety and the safety of any other person who may be affected by his/her action[s] at work.
(d) To comply with any disciplinary rules or obligations in force at the premises where services are performed to the extent that they are reasonably applicable.
(e) To comply with all reasonable instructions and
requests, within the scope of the agreed services, made either by the
Employment
Business or the Client.”
The material changes made to these undertakings in the
version applicable from 1 January 1994 were the removal of the reference to the
Employment
Business (i.e.
Reed
) in paragraphs (b) and (e) and the insertion in
(d) of a reference to the “Client’s” premises where “the” services are “being”
performed.
44. The conditions
imposed no obligation, either on Reed
to provide work, or for the temp worker
to serve for any particular time. Clause 4 provided:
“There is no obligation on the Employment
Business
to provide or the Temporary Worker to serve any normal number of hours in any
day or week. In the event of the Temporary Worker declining to accept any
offer of work, for any period, the Contract shall be considered not normally to
involve work for such a period.”
“This Contract shall be deemed not to have commenced until the Temporary Worker has presented him/herself at the Client’s premises and has carried out work under the Contract.”
“The Employment
Business shall pay wages to the
Temporary Worker in respect of hours worked as certified by the Client,
calculated at the hourly rates set out in the Temporary Worker’s copy of the
Timesheet to be paid weekly in arrears subject to deductions for the purposes
of National Insurance, PAYE or any other purpose for which [an employer] [1
June 1985: the
Employment
Business] is required to make deductions by law.”
“5. Reed
shall make advances to the Temporary worker
in respect of hours worked as certified by the Client and calculated at the
hourly rates (a proportion of which may be Profit Related Pay) agreed at the
commencement of the contract. The Temporary Worker irrevocably appoints
Reed
as
his/her agent to prepare and submit accounts and collect and recover fees,
expenses, charges and extras in the name of
Reed
. The commission due to
Reed
will be deducted from the monies received from the Client.
6. Advances in respect of fees earned by Temporary
Workers may at the discretion of Reed
be made weekly or monthly in arrears or
such longer or shorter period as may be agreed between
Reed
and the Temporary
Worker.
7. Reed
is responsible for making deductions from
advances for Earnings Related Insurance and Income Tax under Schedule E in
accordance with the Income and Corporation Taxes Act 1988 (section 134) and for
transmitting these to the Inland Revenue.”
48. For reasons
which will become apparent we were invited by Mr Peacock to compare the
conditions of work applicable to the healthcare business in 1990 with the
conditions applicable to non-healthcare (1985 version). We find that the
conditions are not materially different. In particular, the obligations of the
temp worker to Reed
are the same, and there is no material difference in the
then-applicable payment provisions.
49. We were shown a
number of examples of Reed
’s advertising material in relation to its temp
business. Its advertisements directed at clients or potential clients
emphasised
Reed
’s own professionalism and the ways in which it identified the
client’s precise requirements with a view to matching a worker to those
particular needs. The material focussed also on the evaluation, testing and
training of temp workers undertaken by
Reed
.
Reed
’s policy of making no charge
for a temp worker who proved unsuitable a short time after commencing the
engagement was also emphasised.
50. In its
advertisements for temp workers the primary focus was on the freedom that temporary
assignments offer. The rewards offered by Reed
to temp workers – described as
“top rates, holiday pay, Bank Holiday pay, bonuses and regular incentives” as
well as luncheon vouchers – were also typically emphasised.
51. We have referred
earlier to the fact that Reed
was licensed under the
Employment
Agencies Act
1973, both as an “
employment
agency” and as an “
employment
business”. These
terms are defined by s 13(2) and (3) of that Act as follows:
“(2) For the purposes of this Act ‘employment
agency’ means the business (whether or not carried on with a view to profit and
whether or not carried on in conjunction with any other business) of providing
services (whether by the provision of information or otherwise) for the
purposes of finding persons
employment
with employers or of supplying employers
with persons for
employment
by them.
(3) For the purposes of this Act, ‘employment
business’ means the business (whether or not carried on with a view to profit
and whether or not carried on in conjunction with any other business) of
supplying persons in the
employment
of the person carrying on the business, to
act for, and under the control of, other persons …”
52. Employment
here
is not used solely in the sense of a contract of service. A wide meaning
applies for this purpose. Section 13(1) provides that:
“In this Act - …
‘employment
’ includes –
(a) employment
by way of
professional engagement or otherwise under a contract for services;
…
and ‘worker’ and ‘employee’ shall be construed accordingly …”
53. We have seen
that the conditions of work issued by Reed
, other than for
Reed
Nurse,
referred, in the introductory wording, to regulation 9(6) of a certain
statutory instrument. That SI is the Conduct of
Employment
Agencies and
Employment
Business Regulations 1976 (1976 No 715). Regulation 9 applies to
employment
businesses and, so far as is material, provides as follows:
“(1) A contractor [that is, the person carrying on
the employment
business] shall, before entering into a contract with a hirer [the
person to whom a contractor supplies workers to act for, and under the control
of, that person in any capacity] to supply him with a worker, ensure that the
hirer has been informed of the current terms of business of the contractor
including –
(a) the procedure to be followed if a worker supplied to the hirer proves unsatisfactory;
(b) details of any fee
payable by the hirer where a worker supplied terminates his contract with the
contractor and enters into direct employment
with the hirer;
(c) whether workers supplied to the hirer are to be employed under contracts of service with the contractor, or are to be self-employed [employed otherwise that under a contract of service, or of apprenticeship], or may in some cases be employed under contracts of service with the contractor and in others be self-employed.
…
(6)(a) A contractor shall, on entering into a
contract with a worker who is to be supplied to a hirer, give the worker a
written statement containing full details of the terms and conditions of employment
of the worker, including –
(i) whether the worker is employed by the contractor under a contract of service or as a self-employed worker;
(ii) the kind of work which the worker may be supplied to a hirer to do;
(iii) the minimum rates of pay applicable to such work, and details of any expenses payable.”
54. We have noted
that the Employment
Agencies Act 1973 did not apply to
Reed
Nurse. The reason
for this can be found in s 13(7) of that Act: it does not apply to any agency
for the supply of nurses as defined in s 8 of the Nurses Agencies Act 1957. The
1957 Act regulated the provision of nursing staff and nursing services. Nurses’
agencies had to be licensed. An “agency for the supply of nurses” was defined
at s 8 of the 1957 Act as:
“… the business (whether or not carried on for gain and whether or not carried on in conjunction with another business) of supplying persons to act as nurses, or of supplying persons to act as nurses and persons to act as midwives …”
55. VAT is charged
by reference to the value of a supply of, in this case, services (VATA, s
2(1)). Section 19 sets out the value of a supply which is made for a
consideration in money: the value is “such amount as, with the addition of the
VAT chargeable, is equal to the consideration”. What is in issue in these
appeals as issue (1) is the amount of the consideration for, and consequently
the value of, the supply which Reed
makes to its client.
“(1) Where a person has (whether before or after the commencement of this Act) paid an amount to the Commissioners by way of VAT which was not VAT due to them, they shall be liable to repay the amount to him.
(2) The Commissioners shall only be liable to repay an amount under this section on a claim being made for the purpose.
(3) It shall be a defence, in relation to a claim under this section, that repayment would unjustly enrich the claimant.
…
(6) A claim under this section shall be made in such form and manner and shall be supported by such documentary evidence as the Commissioners prescribe by regulation; and regulations under this subsection may make different provision for different cases.
(7) Except as provided by this section, the Commissioners shall not be liable to repay an amount paid to them by way of VAT by virtue of the fact that it was not VAT due to them.”
“(1) Where a person—
(a) has accounted to the Commissioners for VAT for a prescribed accounting period (whenever ended), and
(b) in doing so, has brought into account as output tax an amount that was not output tax due,
the Commissioners shall be liable to credit the person with that amount.
…
(2) The Commissioners shall only be liable to credit or repay an amount under this section on a claim being made for the purpose.
(2A) Where—
(a) as a result of a claim under this section by virtue of subsection (1) or (1A) above an amount falls to be credited to a person, and
(b) after setting any sums against it under or by virtue of this Act, some or all of that amount remains to his credit,
the Commissioners shall be liable to pay (or repay) to him so much of that amount as so remains.
(3) It shall be a defence, in relation to a claim under this section by virtue of subsection (1) … above, that the crediting of an amount would unjustly enrich the claimant.
…
(6) A claim under this section shall be made in such form and manner and shall be supported by such documentary evidence as the Commissioners prescribe by regulations; and regulations under this subsection may make different provision for different cases.
(7) Except as provided by this section, the Commissioners shall not be liable to credit or repay any amount accounted for or paid to them by way of VAT that was not VAT due to them.”
“Any claim under section 80 of the Act shall be made in writing to the Commissioners and shall , by reference to such documentary evidence as is in the possession of the claimant, state the amount of the claim and the method by which that amount was calculated.”
61. Although the
central question in issue (1) is the value of Reed
’s supplies to its clients in
respect of the temp workers, this first involves a consideration of the nature
of those supplies. Essentially, what
Reed
submits is that its supplies were
limited to the introduction of the temp workers to its clients in return for an
introduction fee, in the form of
Reed
’s commission. HMRC argue, on the other
hand, that
Reed
made a supply of the temp workers (a supply of staff), the
consideration for which was the whole amount charged to the client.
62. Reed
argues that
it acted as an intermediary between temp workers and clients, supplying an
introduction service, which included, as an ancillary element, the collection
of sums paid by clients for the services supplied by the temp workers after
accounting for income tax and national insurance contributions. On this basis,
argues
Reed
, once
Reed
had introduced the two parties, the temp workers
supplied their services (that is to say, the work performed during assignments
with clients) directly to the clients. The temp workers gave no consideration
for any supply of introduction services made to them by
Reed
. Clients, on the
other hand, paid
Reed
a commission in respect of the supply of introduction
services to them by
Reed
.
Reed
submits that it should only be liable to
account for VAT on the commission. As the temp workers supplied their services
directly to the client (and therefore these services were not supplied by
Reed
),
Reed
should not be liable to account for VAT on the consideration paid by the
client for those services, comprising the amount paid to the temp worker (from
which
Reed
would deduct income tax and NICs on behalf of the temp worker to
arrive at a figure of net income for the temp worker) and employers’ national
insurance contributions.
63. HMRC do not
argue that the temp workers supply their services to Reed
, and that
Reed
makes
an onward supply of those services to the client. Instead they submit that
Reed
was supplying services, as principal, to the client, comprising the supply
of temporary staff. The consideration for
Reed
’s supply was the whole amount
charged to the client. Out of that whole amount
Reed
met certain overheads –
such as remuneration of its temporary staff – but these were its costs,
to be met from its income from sales.
64. There was no
dispute between the parties as to the approach we should adopt in determining
the nature of the supply. We were referred to a number of authorities, key among
which, in our view, are the recent judgment of the ECJ in HM Revenue and
Customs v Loyalty Management Ltd and Baxi Group Ltd (Cases C-53/09 and
C-55/09) [2010] STC 2651 and Customs and Excise Commissioners v Reed
Personnel Services Ltd [1995] STC 588.
66. Reed
Personnel Services Ltd was decided much earlier, in 1995, but it reflects
the same approach as has been confirmed by the ECJ in Loyalty Management Ltd.
It is peculiarly resonant in the present case, being founded upon the nature of
the supplies made by
Reed
Nurse in respect of the provision of temporary nurses
to hospitals and the consideration for those supplies. The tribunal found that
the nursing services were supplied by the nurses and not by
Reed
and that
Reed
supplied its administrative services as agent, the consideration for these
supplies being the commission
Reed
received. This decision was upheld in the
High Court by Laws J on the basis that the nature of the supplies was a matter
of fact for the tribunal and there was no proper basis on which the court
should interfere with the tribunal’s conclusions, which rested on its overall
view of the facts (see pp 595j-596).
67. It was argued in
Reed
Personnel Services Ltd on behalf of the commissioners that if the
contracts in question were not qualified by oral agreement, or by custom and
usage, they must inevitably conclude the issue as to the nature of the
supplies. That proposition was rejected by Laws J for the reasons set out in
the following extract (at p 595a-d):
“First, as I have already said, the concept of 'supply' for the purposes of VAT is not identical with that of contractual obligation. Secondly, in consequence, it is perfectly possible that although the parties in any given situation may conclude their contractual arrangements in writing so as to define all their mutual rights and obligations arising in private law, their agreement may nevertheless leave open the question, what is the nature of the supplies made by A to B for the purposes of A's assessment of VAT. In many situations, of course, the contract will on the facts conclude any VAT issue, as where there is a simple agreement for the supply of goods or services with no third parties involved. In cases of that kind there is no space between the issue of supply for VAT purposes and the nature of the private law contractual obligation. But that is a circumstance, not a rule. There may be cases, generally (perhaps always) where three or more parties are concerned, in which the contract's definition (however exhaustive) of the parties' private law obligations nevertheless neither caters for nor concludes the statutory question, what supplies are made by whom to whom. Nor should this be a matter for surprise: in principle, the incidence of VAT is obviously not by definition regulated by private agreement. Whether and to what extent the tax falls to be exacted depends, as with every tax, on the application of the taxing statute to the particular facts. Within those facts, the terms of contracts entered into by the taxpayer may or may not determine the right tax result. They do not necessarily do so. They will not do so where the contract, though it tells all the parties everything that they must or must not do, does not categorise any individual party's obligations in a way which inevitably leads to the conclusion that he makes certain defined supplies to another. In principle, the nature of a VAT supply is to be ascertained from the whole facts of the case. It may be a consequence, but it is not a function, of the contracts entered into by the relevant parties.”
68. Mr Justice Laws
went on to hold that, whilst where the facts involve only two parties there is
necessarily little or no room for argument over who supplies what to whom, the
position might be very different where there are three or more parties. The
parties’ contractual arrangements, even though exhaustive of their private law
obligations, may not, and need not, define and conclude the position for VAT
purposes. He held (at p 595g) that the Reed
Nurse case fell within that latter
class.
69. Reed
Personnel Services Ltd has been quoted with approval in a number of
subsequent cases, including by the House of Lords in Eastbourne Town Radio Cars Association v Customs and Excise Commissioners [2001] STC 606 and by
the Court of appeal in Tesco plc v Customs and Excise Commissioners
[2003] STC 1561. In the latter case, after an extensive survey of the relevant
authorities, Jonathan Parker LJ summarised his conclusions as follows (at [159]):
“So what is the correct approach in the instant
case? There are number of pointers in the authorities referred to in Part 3 of
this judgment, under heading (a) 'Authorities as to the approach to be adopted
in analysing the relevant transaction'. The more significant of such pointers
in the context of the instant case seem to me to be these: 1. The resolution of
the issue as to the application of para 5 in the instant case depends upon the
legal effect of the Clubcard scheme, considered in relation to the words of the
paragraph (see British Railways Board especially [1977] STC 221 at 223,
[1977] 1 WLR 588 at 591 per Lord Denning MR: see [34] above). 2. In considering
its legal effect, the entire scheme must be examined (what is the 'entire
scheme' for this purpose being objectively determined by reference to the terms
agreed) (see Pippa Dee especially [1981] STC 495 at 501 per Ralph Gibson J:
see [33] above). 3. The terms contractually agreed may not be determinative as
to the true nature and effect of the scheme (Reed
, see [36] to [38]
above): it is necessary to go behind the strictly contractual position and to
consider what is the economic purpose of the scheme, that is to say 'the
precise way in which performance satisfies the interests of the parties' (see
the Advocate General's opinion in Mirror Group, para 27: see [41]
above). 4. Economic purpose is not the same as economic effect. The fact that
two transactions have the same economic effect does not necessarily mean that
they are to be treated in the same way for VAT purposes (see Littlewoods
especially at para 84 per Chadwick LJ: see [42] above). 5. Equally, the
economic purpose of a contract (what the Advocate General in Mirror
Group called the 'cause' of a contract: see para 27 of
his opinion: at [41] above) is not to be confused with the subjective reasons
which may have led the parties to enter into it (in so far as those subjective
reasons are not obviously evident from its terms) (see Mirror Group para
28: at [41] above). The Advocate General went on to observe (an observation
which seems to me to be particularly apt in the context of the tribunal's
decision in the instant case):
'… failure to distinguish between the cause of a contract and the motivation of the parties has been the source of misunderstandings, … and has complicated the task of categorising the contracts at issue.'”
71. Reed
Personnel Services Ltd was also recently considered by Lewison J in A1
Lofts Ltd v Revenue and Customs Commissioners [2010] STC 214. After referring
to the passages from the judgment of Laws J we have cited above, Lewison J went
on to say (at [40]) that his understanding of what Laws J had said was that the
identification of the parties’ obligations is a matter of contract, but that
the nature and classification of those obligations, once identified, and in
particular whether they answer a particular statutory description, is not necessarily
concluded by the contract. Read in this way he described
Reed
Personnel
Services Ltd as exemplifying a common method of reasoning. The first task
of the tribunal therefore is to construe the contracts (see [49]).
73. Ms Whipple, for
HMRC, says that the context in which the contractual arrangements come to exist
is also a material factor. In this regard she invited us to consider the
regulatory framework in which Reed
’s temp business operated. In doing so, she
submitted that, so far as is material for these appeals,
Reed
acted as
principal. It supplied temp workers to its clients, acting as principal. It
did not merely introduce temp workers, acting as agent.
74. We have set out
above the regulatory regime that applied to Reed
in the relevant period. There
is no dispute but that
Reed
operated both as an
employment
agency and as an
employment
business within the meaning of the
Employment
Agencies Act 1973.
What is disputed is the relevance of this fact in determining the VAT
treatment.
75. Ms Whipple
submitted that the distinction between operating as an employment
agency on the
one hand, and as an
employment
business on the other is determinative of the
VAT analysis. An
employment
agency supplies agency services for which the
consideration is the commission paid by the client. The remainder of the amount
invoiced, representing staff costs, is simply a disbursement on which no VAT is
due. On the other hand, it was argued, an
employment
business supplies staff,
for which the consideration is, applying the general rule, the whole amount
charged to the client. The whole amount charged is accordingly subject to
VAT. Ms Whipple further submitted that the contracts between
Reed
and the temp
worker, referring as they did to reg 9(6) of the 1976 Regulations, show
conclusively that
Reed
had chosen the
employment
business, and thus the
principal, model in relation generally to its temp business.
76. In further support
of her submissions that Reed
acted as principal, Ms Whipple referred us to a
number of factors:
(1)
Reed
invoiced its clients a single sum which did not split out the
commission element. It did not ordinarily inform its clients what the
commission element was. Ms Whipple acknowledged that if clients asked the
question they would be informed of the level of commission, that in some cases
the commission might be the subject of negotiation, and that levels of temp
worker pay, and consequently the commission uplift in the charge rate would
commonly be known. She also accepted that the national agreements adopted a
different pricing model, with the multiplier enabling ready calculation of the
commission element. But nonetheless the clients would still be charged a
single figure for a single supply of staff.
(2)
The advertising material suggests that the service being provided by
Reed
enables the client to buy in what it needs for as long as it needs it, and
to return it when there is no longer a need. This is closer to a construction
that
Reed
is supplying staff to act under the client’s control rather than
Reed
merely acting as an agent, introducing two people who will then come to their
own terms and make their own arrangements.
(3)
Reed
assumed a number of obligations to temp workers both under and
outside the contracts. These included arrangements relating to loyalty bonus,
luncheon vouchers, provision of training, profit related pay and the obligation
to pay the temp even if the client did not reimburse
Reed
, for example if the
contract was terminated shortly after commencement. This suggests that
Reed
was supplying the temp workers to the clients and not merely introducing them.
(4)
For the period, prior to 1 August 1975, when Reed
was not obliged by law
to operate a PAYE system, it nevertheless did so, suggesting that
Reed
was
operating as an employer, even if not in the technical sense, and accordingly
was making a supply of staff.
77. In our view the
proper analysis of the nature of Reed
’s supply to its clients does not depend
on whether
Reed
was acting in a particular case as principal or as agent. True
it might be that an agency arrangement would be more likely to be analysed as a
purely introduction service, but in our view the converse is not the case. The
analysis is more complex than that; we do not find the principal and agent
formulation to be conclusive of the economic reality we must ascertain. There
is no doubt that
Reed
is acting as principal in relation to the supply it makes
to the client, but that does not determine the nature of that supply. That
falls to be determined by an overall objective view of the arrangements as a
whole between the three parties involved:
Reed
, the client and the temp worker.
79. In particular,
we do not share the view put forward by Ms Whipple that a business that
operates, as a regulatory matter, as an employment
business necessarily
supplies staff as principal. We can understand such a proposition, though we
make no finding in this respect, where a business employs or engages staff
under contracts which provide for the staff to provide their services to that
business and that business then provides those staff to a third party. But
although this may be one instance where that business would fall within the
definition of “
employment
business” in the 1973 Act, that definition goes much
wider than that; it includes cases, such as this, where no services are
provided by the temp worker to
Reed
, but there is nevertheless a contract or
engagement between the two which carries obligations on both sides. Whilst it
is right, as Sales J said in Accenture Services Limited v Revenue and
Customs Commissioners and others [2009] EWHC 857 (Admin) (at [40]), that
the definition of “
employment
business” in s 13(3) of the 1973 Act is
predicated on the supplier remaining the employer of the person supplied, the
learned judge recognised at the same time that the definition also encompassed
cases where the “
employment
” where the supplier would not possess full rights
of management control. In the case of
Reed
, its contractual relationship with
the temp worker commences only once it has introduced the temp worker to the
client, at which point it is the client that has the requisite control over the
temp worker. In our view, merely because the way a business operates means that
it becomes subject to a regulatory regime does not mean that the regulatory
framework must determine the nature of the business or the supplies made in the
course of that business. The regulatory framework has an overlap with the
business in those circumstances, but it does not define it.
80. There are three
parties to the arrangements we have to consider: Reed
, the client and the temp
worker. There are contracts between
Reed
and the client and between
Reed
and
the temp worker, but no contract between the temp worker and the client. It is
common ground that under the
Reed
– temp worker contract there is no obligation
on the temp worker to provide any services to
Reed
for onward supply to the
client, and we find that there is no undertaking on the part of the temp worker
to perform services for the client as directed by
Reed
. The essential obligation
on the part of the temp worker to
Reed
is to comply with the reasonable
requests of the client. The temp worker provides services to the client.
Reed
pays the temp worker for the work carried out by the temp worker.
Reed
receives a fee from the client which includes the pay rate which, after
deduction of income tax and NI, is paid by
Reed
to the temp worker, and
Reed
’s
commission.
81. Ms Whipple referred us to Customs and Excise Commissioners v Redrow Group plc [1999] STC 161 in the House of Lords. That case concerned a tripartite arrangement whereby Redrow operated a sales incentive scheme under which it agreed to pay the fees of estate agents it instructed on the sale of a prospective purchaser if and when the purchaser completed on the purchase of a new home built by the Redrow group. It was held that the relevant test was whether the supply was received in connection with the business activities of the taxable person for the purpose of being incorporated within its economic activities. The fact that the prospective purchaser had also received a service as part of the same transaction did not prevent there being a supply of services by the estate agents to Redrow.
“The solution lies in two features of the tax to which I have already referred. The first is that anything done for a consideration which is not a supply of goods constitutes a supply of services. This makes it unnecessary to define the services in question. The second is that unless the services are rendered for a consideration they cannot constitute the subject matter of a supply. In fact, of course, there can be no question of deducting input tax unless Redrow has incurred a liability to pay it as part of the consideration payable by him for a supply of goods or services.
In my opinion, these two factors compel the conclusion that one should start with the taxpayer's claim to deduct tax. He must identify the payment of which the tax to be deducted formed part; if the goods or services are to be paid for by someone else he has no claim to deduction. Once the taxpayer has identified the payment the question to be asked is: did he obtain anything—anything at all—used or to be used for the purposes of his business in return for that payment? This will normally consist of the supply of goods or services to the taxpayer. But it may equally well consist of the right to have goods delivered or services rendered to a third party. The grant of such a right is itself a supply of services.”
83. Ms Whipple
argued that, comparing the facts in Reed
’s case to the facts in Redrow,
whereas the performance by the temp worker of physical services is undoubtedly
a benefit to the client, there is in the normal course no contractual
arrangement between the temp worker and the client. What there is is a
requirement, Ms Whipple submitted, as between
Reed
and the temp worker for the
temp worker to provide physical services to the client. As recognised in Redrow,
this was a supply of services by the temp worker to
Reed
, from which
Reed
could
then act as principal in supplying the temp worker’s services and its own
services to the client.
84. We do not accept
this analysis. Firstly, in our view it is inconsistent with the contractual
position as between Reed
and the temp worker. Whereas
Reed
undertakes to offer
the temp worker opportunities to work, the temp worker is expressly under no
obligation to accept any such offer. There is no obligation on the temp worker
to provide any services to anyone. It is only after the temp worker has
started work at the client’s premises that the conditions of work apply. It is
wrong, therefore, in our view, for the contractual position to be characterised
as a requirement on the part of the temp worker to provide physical services to
the client. Not only is that not, in our view, the contractual position, it is
also contradicted by the evidence we heard as to the day-to-day operations of
the business.
85. Secondly, the
supply identified in Redrow was the grant of a right to have services
rendered to a third party. Redrow chose the agents and instructed them. In
return for the payment it made it obtained a contractual rights which included
overriding any alteration in the agents’ instructions which the prospective
purchasers might give. Redrow itself bore the economic cost of those services,
without reimbursement from the third party. There is no such grant in this
case, and the payments of the pay rates by Reed
to the temp worker are
reimbursed to
Reed
by the client.
Reed
does not, we consider, bear the
economic cost of the temp worker’s services to the client; that cost is not a
cost component of
Reed
’s own supply. In our view what
Reed
pays to the temp
worker is not consideration for any supply by the temp worker to
Reed
. The
temp worker has certain contractual obligations to
Reed
, but the performance of
those obligations does not include the provision of services to the client and
is not an economic activity of the temp worker in relation to
Reed
.
86. In these
circumstances, having regard to the contracts between Reed
and the client and
the temp worker, and the facts as a whole, viewed objectively, we find that the
economic reality is that the supplies by
Reed
to its clients in respect of the
temp workers are supplies of introductory services and other ancillary
services, including evaluation of the temp worker’s capabilities, the taking of
references and a payments service with respect to the payments of the pay rates
to the temp worker.
87. Contrary to Ms
Whipple’s submission, we do not consider that what Reed
did in this respect
amounted to a supply of staff. As Sales J remarked in Accenture (at
[54]), the only point in EU law where it is relevant to distinguish a supply of
services consisting in a supply of staff from other supplies of services is in
relation to cross-border supplies. The same expression was used in the extra
statutory “staff hire” concession considered in Accenture, which was
held to contain its own definition, and it was not possible to say with
certainty whether or not this reflected the meaning under EU law. Accenture
was a case on different facts to those we are considering. It concerned a
secondment arrangement where it was common ground that, but for the concession,
VAT would be payable on the whole of the consideration received by the
provider. That, by contrast, is the very issue in this case.
88. In our view, in
ascertaining the nature of a supply it is relevant to have regard to what it is
that the supplier is capable, as a matter of contract, of providing, and on
that basis to consider what in economic reality has been supplied. In the case
of Reed
, at no time did
Reed
exercise control over its temp workers, such that
control could be ceded by
Reed
to its clients. The obligations owed by a temp
worker to
Reed
did not amount to an ability of
Reed
to exercise control over
the temp worker, and in any event those obligations commenced only after the
temp worker had accepted the assignment, and accordingly had come under the control
of the client. The making of a supply of staff must in our view, at the least,
connote a passing of control of staff from the supplier to the person receiving
the supply. There is no such passing of control in this case. Absent that
factor,
Reed
was capable only of making a more limited supply, which can, in
our view, be characterised only as a supply of introductory services, along
with the ancillary services to which we have referred.
89. We have reached
this conclusion without reference to the decision by the tribunal on the facts in
Reed
Personnel Services Ltd, although we heard extensive argument on
that case. We agree with Ms Whipple in this respect that the tribunal decision
does not greatly assist in these appeals, and we place no reliance upon it.
The issue before that tribunal was whether
Reed
Nurse supplied nursing services
to its clients as principal (which would have been exempt supplies and thus
Reed
would have been a partially exempt trader), or acted merely as a
recruitment agency, recruiting nurses for its clients for a fee. The issue was
described by the tribunal as whether the nurses were supplying their services
to
Reed
Nurse so that
Reed
Nurse by using those services supplied nursing
services to its clients, or the nurses were supplying their services directly
to the clients through the introduction of
Reed
as a client. This is a
different issue to the one that we have been asked to determine, and the
arguments and submissions are accordingly not the same. Accordingly, save for considering
this appeal in the light of the principles set out by Laws J in the High Court
in
Reed
Personnel Services Ltd, and despite our being satisfied that the
conditions of work at issue are materially the same in these appeals as those
in the earlier appeal, we base our decision solely on the facts and
circumstances of these appeals, and we do not derive any assistance from the
earlier tribunal finding.
90. In our judgment
the payment which Reed
makes to the temp worker of the amount calculated by
reference to the pay rate is a payment made by
Reed
on behalf of the client in
satisfaction of the consideration for the supply by the temp worker to the
client. To this extent, as we have stated above, that payment is not a cost
component of
Reed
’s own supply. It can in our view only be analysed as a
payment by
Reed
on behalf of the client, for which
Reed
is subsequently
reimbursed by the client. That element of the charge rate cannot therefore be
consideration for
Reed
’s own supply to the client of the introductory service.
The consideration for
Reed
’s own supply is accordingly the amount of the total
charged by
Reed
to the client less the amount of the consideration for the temp
worker’s supply to the client, which is paid by
Reed
to the temp worker and
reimbursed by the client through the pay rate element of the charge rate. The
fact that
Reed
invoiced the client for a single composite amount does not
preclude this conclusion, as the consideration for
Reed
’s own supply can be
objectively ascertained. That equates, in our view, to the “gross commission”
earned by
Reed
as an element of the charge rate. Payments to temp workers
outside the pay rates reimbursed by the client, such as holiday pay and loyalty
bonus, are cost components of
Reed
’s own supply, and are not therefore to be
taken as reducing the value of that supply.
91. In summary,
therefore, in relation to issue (1), we decide that the supplies subject to
these appeals made by Reed
to its clients in respect of temp workers in the
relevant periods were supplies of introductory and ancillary services, and the
consideration for those supplies was the gross commission element of the charge
rate paid by the client to
Reed
, that is, the charge rate less the pay rate
paid by
Reed
to the temp worker and associated national insurance contributions.
92. The parties
disagree as to the effect of the 2009 Demand. Reed
’s position is that it was
an amendment to the 2003 Claim. HMRC say it was a new claim, made on 27 March
2009. As we have indicated earlier, this is significant in that if it is a new
claim the defence of unjust enrichment will, subject to the resolution of Issue
(3), be available to HMRC in respect of the claims emanating from the 2009
Demand; if it is an amendment to the 2003 Claim, and thus encompassed within
that claim made on 17 June 2003, it is agreed that HMRC will not be able to
rely on the defence of unjust enrichment in that respect.
93. Reed
’s position
may be summarised as follows:
(1) The Tribunal has jurisdiction to determine whether the 2009 Demand was an effective amendment to the 2003 Claim.
(2) Whether the 2009 Demand was an effective amendment to the 2003 Claim is a question of fact and law.
(3) Whether the 2009 Demand was an effective amendment to the 2003 Claim is not a matter of discretion for either the Tribunal or HMRC.
(4) The 2009 Demand was, in fact, an effective amendment to the 2003 Claim.
94. HMRC, on the other hand, argue that:
(1) The Tribunal has no jurisdiction to resolve the issue of whether the 2009 Demand is an amendment to the 2003 Claim. The VATA does not confer on the Tribunal any specific jurisdiction to consider whether any claim which has already been made can be amended.
(2) HMRC themselves have the power to treat a claim as an amendment to an existing claim under their collection and management powers (VATA, Sch 11, para 1; Commissioners for Revenue and Customs Act 2005, ss 5,6 and 9). However, the VATA confers no general supervisory jurisdiction over the manner in which HMRC carry out their statutory duties and powers.
(3) If the Tribunal considers that it has jurisdiction to decide for itself whether the 2009 Demand is to be allowed to proceed as an amendment to the 2003 Claim, the conclusion should be that in the circumstances of this case it has no discretion to allow the amendment.
(4) If nevertheless the Tribunal were to decide that it had a discretion to permit the amendment, that discretion must be exercised judicially, and the Tribunal should not exercise its discretion as the consequence of HMRC not being able to rely on the defence of unjust enrichment would be a substantial prejudice to HMRC and indeed to the public interest.
“(1) … an appeal shall lie to the tribunal with respect to any of the following matters:
…
(t) a claim for the crediting or repayment of an amount under section 80 …”
96. In support of
Reed
’s argument, Mr Peacock referred us to two decisions of the former VAT and
Duties Tribunal. The first is University of Liverpool (no 16769) which
concerned claims made by a firm of accountants on behalf of the university in
respect of residual input tax attributable to both taxable and exempt
supplies. An initial claim was made in August 1993, followed by two further
claims in January and November 1994. Subject to minor agreed adjustments HMRC
met those claims.
101.These are
cases where the tribunal has considered whether a later claim was an amendment
of an existing claim. In this case HMRC’s argument is that the tribunal has no
such jurisdiction at all. What is said is that Reed
’s complaint is not a
challenge to the refusal of a s 80 claim (which is the appealable matter under
s 83(1)(t)), but a complaint about HMRC’s conduct in handling the claim. It is
submitted that the tribunal must approach the matter on the basis that the 2003
Claim and the 2009 Demand are separate claims.
104. We should
add, in case there is any doubt, that we reached our conclusion on the
jurisdiction question without reliance upon Oxfam v Revenue and Customs
Commissioners [2010] STC 686. We say this because both parties indicated
that they wished to reserve their position were the tribunal to find that the
amendment of s 80 claims were a matter for HMRC’s discretion, in which case
Reed
would seek to argue that the Tribunal could review the exercise of that
discretion, in line with what Sales J said in Oxfam, and HMRC would
oppose that approach.
107. The 2003
Claim was based on estimated overpaid output tax for the period 1973 – 1990 on
supplies by Reed
of temporary workers to the irrecoverable sector. The
starting point for this calculation was the value of the 1991-93 claims, also
in respect of the irrecoverable sector, which had been repaid by HMRC. Those
claims were compared with the total net turnover, and the resulting average
percentage applied across the net turnover for each year from 1973 to 1990.
This provided an estimate of the net sales figure – for the irrecoverable
sector – for each year upon which VAT was charged but not due, to which there
was then applied the VAT rate applicable for each year to give the resultant
VAT claim.
109. Reed
argues
that the 2009 Demand constituted an amendment to the 2003 Claim. All that
Reed
did was to recalculate the amount by which it overpaid VAT for the period 1973
– 1990. The 2003 Claim was still outstanding (it had not been finally
determined or met in full by HMRC) at the time of the 2009 Demand. The 2009
Demand:
(1) is drafted in the form of an amendment to the 2003 Claim;
(2) is in respect of the same period (1973-90) as the 2003 Claim;
(3) is the same type of claim as the 2003 Claim (that is, a s 80 VATA claim for overpaid output tax);
(4) arises out of the same facts and matters as the 2003 Claim (that is, the supply of the service of introducing temp workers to clients);
(5) has a common legal foundation with the 2003 Claim;
(6)
arises as a result of the same error (that is, accounting for VAT on the
whole sum received by Reed
rather than just on
Reed
’s commission); and
(7) was made in time (that is, prior to 31 March 2009, which was the ultimate deadline imposed for such claims by s 121, Finance Act 2008).
113. In this
case, in our view, the subject matter of the 2003 Claim was clearly identified
by Reed
, by reference to the earlier settled claims, as relating to VAT
overpaid as regards supplies to the irrecoverable sector. The 2009 Demand did
not relate to that sector but to the remainder of
Reed
’s business, which
covered supplies to clients able to recover, in whole or in part, the VAT on
those supplies. The 2009 Demand does not arise out of the same subject matter
as the 2003 Claim. We do not agree with Mr Peacock when he argues that what is
relevant to claims of this nature is the correct analysis of the supplies made
by
Reed
, and that the tax status (irrecoverable or recoverable sector) of
Reed
’s clients is irrelevant. To the contrary, that tax status defined the
subject matter of the 2003 Claim which
Reed
chose to make; it was clearly
relevant, indeed it was core, to the formulation of
Reed
’s claim at that time.
The 2009 Demand covered different ground and cannot accordingly be regarded as
relating to the same subject matter as the 2003 Claim.
115. On the basis
of our decision in respect of issue (2), the question raised by issue (3), the
availability of the unjust enrichment defence as a matter of principle, arises
both in relation to the 2009 Claim and the 2009 Demand. Reed
’s case in this
respect is that, on the basis of EU law, HMRC cannot rely upon an unjust
enrichment defence at all in respect of either claim.
116. What Reed
says in essence is that if, as we have found, it has succeeded on issue (1) and
has thus overpaid VAT, it has an EU law right to recover that overpayment.
Further, it says, if it had been able to make a claim for the amounts at issue
in the 2009 Claim and the 2009 Demand up to 26 May 2005, then no defence of
unjust enrichment would have been available to HMRC, and
Reed
would have had an
unqualified right, under EU law, to make a claim to recover the overpaid VAT.
It is said that the three-year cap, implemented by the UK government from 4 December 1996, purported to prevent
Reed
from making such a claim.
Only in February 2008, with the publication of Business Brief 07/08, did the
government publicly accept that the three-year cap could not apply for the
recovery of VAT overpaid prior to 4 December 1996.
120. The question of how the absence of a transitional period might be remedies came before the House of Lords in Fleming (trading as Bodycraft) v Revenue and Customs Commissioners; Condé Nast Publications Ltd v Revenue and Customs Commissioners [2008] STC 324. Following Marks & Spencer 1, HMRC had announced on 5 August 2002 in a Business Brief a transitional period for section 80 claims of nearly four months, and this had later been extended (following the ECJ judgment in Grundig Italiana SpA v Ministero delle Finanze (Case C-68/96) [1998] ECR I-3775 ECJ) to claims made up to 30 June 2003. The House of Lords held that the issue was not one of statutory interpretation. There was a gap in the legislation which was unfilled, and it was for Parliament or the commissioners, if they chose to do so by means of an announcement disseminated to all taxpayers, to introduce prospectively an adequate transitional period.
(1) EU law does not prevent a national legal system from having a defence of unjust enrichment ([41]).
(2) It is contrary to the principle of fiscal neutrality for there to be a disparity between payment and repayment traders, marketing similar goods, in the treatment of VAT wrongly levied ([48]).
(3) Infringement of the general principle of equal treatment may be established, in matters relating to tax, by kinds of discrimination which affect traders who are not necessarily in competition with each other but who are nevertheless in a similar situation in other respects ([49]).
(4) The different treatment of traders by reference to their positions in relation to the tax authority, as payment or repayment traders, could not be objectively justified, as the fact that a trader benefits from unjust enrichment is unrelated to the position in relation to the tax authority before repayment of the VAT. The unjust enrichment stems, when it occurs, from the refund itself and not from the trader’s previous position as a creditor or debtor vis-à-vis the tax authorities ([52]).
(5) The principles of equal treatment and fiscal neutrality are not infringed merely by the fact that a refusal to make repayment is based on the unjust enrichment of the taxable person. But those principles preclude the prohibition of unjust enrichment being applied only to payment traders and not to repayment traders in a similar situation ([54]).
(6) This infringement of equal treatment is separate from, and accordingly unaffected by, the issue of whether a trader has in fact suffered a loss or disadvantage. So the fact that a trader would in these circumstances be unjustly enriched does not preclude the infringement ([56]).
(7) The national court must, in principle, order the repayment of the whole of the VAT payable to a trader who has suffered discrimination, unless there are other ways of remedying that infringement under national law ([62]).
(8) The national court must set aside any discriminatory provision of national law, without having to request or await its prior removal by the legislature, and apply to members of the disadvantaged group the same arrangements as those enjoyed by the persons in the favoured category ([63]).
125. It is the
reference back to earlier claims, and the retrospective effect of the new
provision, that Reed
now says leads to the present issue.
Reed
’s claims were
made after 26 May 2005, and so, on the face of the UK legislation, are now
subject to the unjust enrichment defence, even though the claims relate to a
period when, according to EU law, the unjust enrichment defence was unlawful
and did not apply. Mr Peacock argues that but for the unlawful three-year cap,
Reed
could have claimed to recover overpaid output tax for the periods and in
the amounts covered by the 2009 Claim and the 2009 Demand. Both claims could
then have been made before 26 May 2005. He submits that
Reed
should be put
into the position it would have been in if it had in fact made such claims. He
argues that the legislative cure for the breach of EU law regarding the
three-year cap requires that taxpayers be put back into the position that they
should have been in 1996. Parliament, he says, has not taken on board its
obligation to make clear in what became s 121 FA 2008 that claims that by
virtue of that provision were to be permitted to 31 March 2009 should be
allowed without regard to the changes to s 80 (and consequently the ambit of
the unjust enrichment defence), because only then would the original breach of
EU law, the unlawful cap, be properly remedied.
126. Mr Peacock
made it clear that he was not arguing that the unjust enrichment defence could
not be retroactive. Indeed, it was accepted that Weber’s Wine World
Handels-GmbH and others v Abgabenberufungskommission Wien (Case-147/01)
[2004] CMLR 7 is authority that retroactive effect of an unjust enrichment
defence is not incompatible with EU law. Nor is it argued that Reed
has a
right to be unjustly enriched, because, unlike the position in Marks &
Spencer 2, it has not yet been ascertained if
Reed
would in fact be
unjustly enriched. That cannot, however, be a reason for upholding a provision
that would otherwise be incompatible with EU principles.
“62. With regard to Community measures, the court has repeatedly held that the principle of legal certainty precludes a measure from taking effect from a point in time before its publication, but that it may exceptionally be otherwise where the purpose to be achieved so demands and where the legitimate expectations of those concerned are duly respected.[2]
63. In the context of national rules concerning the recovery of charges unduly levied, the court has held that, where it has declared a charge to be contrary to Community law, the member state in question is not precluded from adopting new conditions applying to its reimbursement, such as a shorter time limit, provided that the principles of equivalence and effectiveness are observed.[3]
64. With regard to the latter principle, it must not adopt a procedural rule which specifically reduces the possibilities of bringing proceedings for recovery, in particular by retroactively reducing time limits for bringing proceedings without making appropriate transitional arrangements.[4]
65. The limitation of the temporal effect of the ruling in the EKW judgment does not mean that whenever a person had raised a claim before the date of the judgment that claim must be free from any other restriction laid down by national law but rather that, in relation to the period specified, no other claims may be allowed to proceed. Nor is there is anything in the judgment which itself imposes or implies any general condition as to the date of enactment of any applicable national rules or which precludes any retroactive effect thereof.
66. A national rule which does no more than preclude unjust enrichment is compatible with Community law.
67. Where such a rule applies to claims in respect of situations which arose before its enactment, that effect does not seem to me incompatible with Community law. On the one hand, in so far as it seeks to preclude unjust enrichment, it in fact precludes only enrichment which would have occurred after its enactment, provided that there is no provision for recovery of any amount already reimbursed. On the other hand, there can in any event be no legitimate expectation of any such enrichment, since the very concept of legitimacy cannot embrace what is unjust.
68. It is true that in other circumstances a retroactive effect may fall foul of the principle of effectiveness: in Marks & Spencer (para 35 et seq) and Grundig Italiana (para 34 et seq), for example (to cite only the most recent cases), the court has indicated that a retroactive reduction of the period within which reimbursement may be claimed is incompatible with the principle of effectiveness if, in the absence of adequate transitional provisions, it deprives some individuals of their right to reimbursement or allows them too short a period in which to assert that right.
69. Here, by contrast, since Community law does not require a right to reimbursement at all where unjust enrichment would ensue, the fact that, following a change to national law, a claim which might previously have succeeded can on that ground no longer succeed has no impact on the effectiveness of a right conferred by Community law.”
134. Although in Marks
& Spencer 2 the fact that Marks & Spencer had been unjustly
enriched did not prevent the then s 80 being found to have infringed EU law,
that was not because there existed any right to repayment unqualified by a
valid defence of unjust enrichment. It was solely that the defence under the
then s 80 offended against the principles of equal treatment and fiscal
neutrality. Once that infringement was remedied by the 2005 Act, there was, in
our view, no longer scope for Reed
to assert any unqualified right in respect
of a claim made on or after 26 May 2005.
138. For these reasons we determine the issues before us as follows:
(1)
Issue (1). The supplies subject to these appeals made by Reed
to its
clients in respect of temp workers in the relevant periods were supplies of
introductory and ancillary services, and the consideration for those supplies
was the gross commission element of the charge rate paid by the client to
Reed
,
that is, the charge rate less the pay rate paid by
Reed
to the temp worker and
associated national insurance contributions.
(2) Issue (2). The 2009 Demand was a separate claim made on 27 March 2009, and was not an amendment to the 2003 Claim.
(3) Issue (3). HMRC can rely on the defence of unjust enrichment in relation to the 2009 Claim and the 2009 Demand.
140. As this
decision is one of principle only, and in particular, having regard to our
decision, the question whether Reed would be unjustly enriched by repayment of
its claims remains to be determined, we reserve the question of costs until
after final determination of these appeals.
Subject to any application for permission to appeal, the parties may apply for directions for the case management of the outstanding issues that remain for determination in these appeals.
This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.
[1] Versions up to those applicable from 1 January 1994 wrongly identified the SI number as 915. Nothing turns on this, and we have used the correct number as applying to all conditions of work.
[2] See the judgments in Firma A Racke v Hauptzollamt Mainz Case 98/78 [1979] ECR 69 (para 20); more recently Falck SpA v European Commission Joined cases C-74/00 P and C-75/00 P [2002] ECR I-7869 (para 119).
[3] See the judgment in the Dilexport case (para 43) , [cited in footnote 16, above, not reproduced], and para (2) of the operative part of the judgment.
[4] See the Deville case, [cited in footnote 10, above, not reproduced], and, more recently, the Marks & Spencer case (para 34 et seq), [cited in footnote 8, above, not reproduced].