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Cite as: [2011] STI 1500, [2011] UKFTT 200 (TC), [2011] SFTD 720

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Reed Employment Ltd v Revenue & Customs [2011] UKFTT 200 (TC) (24 March 2011)

[2011] UKFTT 200 (TC)




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









- and -










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






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.)

The issues

11.    We set out here the issues that came before us for determination.  As we have indicated, the parties agree that our decision should cover only the specific issues of principle before us, and in particular that at this stage we were not asked to determine any of the figures.  Furthermore, although the parties had earlier agreed the issues for determination, the first issue was clarified in the skeleton argument of Ms Whipple and Mr Smith and further during the hearing, and what we refer to here is that issue as it fell, in light of the submissions we heard, to be determined.

(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.

The facts

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.

The contracts

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.

Terms of business: period 1973 – 1985

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.

Terms of business: period 1985- 1994

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.

37.    Further new terms of business, materially the same as those preceding, were introduced from January 1993.

Terms of business: period 1994 to 1995

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.”

Conditions of work

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”.

41.    The conditions provided that the temporary workers were self-employed under a contract for services, and continued at clause 1:

“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.”

42.    The temp worker was under no obligation to accept any such offer.  Clause 2 of the conditions provided (with square bracketed amendments showing changes in this period):

“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.”

45.    Clause 13 made it clear that the conditions of work only applied once the temp worker had started work for the client:

“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.”

46.    Up to January 1994, the conditions of work contained the following provision regarding payments to the temp worker (variations in this period are set out in square brackets):

“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.”

47.    These payment provisions were changed in the version of the conditions of work applicable from 1 January 1994.  The new provisions were as follows:

“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.”

Reed Nurse

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.

Advertising material

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.

The regulatory regime

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 …”

The law

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.

56.    Section 80 VATA provides for the repayment of overpaid output tax.  It was considerably amended by s 3 Finance (No 2) Act 2005, with effect in any case where a claim under s 80(2) is made on or after 26 May 2005, whenever the event occurred in respect of which the claim was made (F (No 2) A 2005, s 4(6)).  At the time of the 2003 Claim (17 June 2003) the material parts of s 80 read as follows:

“(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.”

57.    In light of the decision of the ECJ in Marks and Spencer 2, both parties accept that HMRC cannot in any event rely upon the defence of unjust enrichment (under s 80(3)) against a claim to recover overpaid output tax which was made before 26 May 2005.  Issue (2) accordingly is concerned with whether the 2009 Demand was an amendment to the 2003 Claim, so as to preclude reliance by HMRC on the unjust enrichment defence.

58.    In relation to the 2009 Claim, and, if issue (2) is decided in favour of HMRC, the 2009 Demand (as a separate 2009 claim), s 80 provides as follows:

“(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.”

59.    As regards the form of the claim and the documentary evidence supporting it, reg 37 of the Value Added Tax Regulations 1995 provides:

“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.”

60.    Finally, issue (3) concerns whether the unjust enrichment defence in the post 26 May 2005 version of s 80 is nevertheless not available to HMRC in respect of the 2009 Claim and, depending on the outcome of issue (2), the 2009 Demand.

Issue (1): Nature and value of Reed’s supplies

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.

65.    In Loyalty Management Ltd the ECJ emphasised that consideration of the economic realities is a fundamental criterion for the application of the common system of VAT (para 39), and that what needs to be established in determining the nature of a supply, and by whom and to whom a supply is made, is the economic reality.

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.'”


70.    Lord Justice Jonathan Parker went on to set out what he considered to be the correct approach to the analysis of the transactions in question in Tesco.  That involved examining the entire cycle of transactions comprised in the schemes at issue in order to determine the VAT analysis objectively (that is, without regard to the parties’ subjective intentions, save in so far as they were reflected in the terms of the scheme) and having regard to the scheme’s economic purpose.  That approach, it seems to us, is appropriate in this case in determining the proper analysis of the supplies and the consideration that is to be attributed to them.

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]).

72.    What we take from all this is that the contracts between the various parties are necessarily a starting point, but may not be determinative of the nature of the supply or the consideration that has been given for it.  That may depend on an objective analysis of all the facts, having regard to the economic purpose of the transactions.  The search is for the economic reality, which may or may not be determined by the contractual arrangements between the parties.

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.

78.    It follows from this that we do not regard the regulatory framework as determinative.  On the other hand, we do not agree with Mr Peacock that, having regard to the European nature of VAT, and the fact that it must be applied consistently throughout the EU, the English law of agency and a domestic regulatory regime cannot have any effect on the analysis.  Whilst neither can be determinative, it is necessary to consider whether the legal structure of the relationship between supplier and customer, or the regulatory environment in which the supplier operates, affects the way in which the business is done so as to impact upon the nature of the supply which is being made.  Having considered that question, however, we do not find that either the principal/agent analysis, nor the regulatory framework which is said to underpin it, do operate to determine the nature of the supply in this case.

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.

82.    In his judgment Lord Millett posed the rhetorical question: on the basis that the nature of the services and the identity of the person to whom they are supplied cannot be determined independently of one another, where should one begin?  He went on (at p171):

“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.

Issue (2): The extent of the 2003 Claim

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.

The Tribunal’s jurisdiction

95.    Under s 80(2) VATA HMRC are liable to credit or repay an amount brought into account as output tax but which was not output tax only on a claim being made for that purpose.  The claim is made to HMRC, and not to the Tribunal (reg 37, 1995 Regulations).  The jurisdiction of the Tribunal stems from the rejection of a claim by HMRC, and is contained in s 83(1)(t):

“(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.

97.    Later, in 1995, another firm of accountants was instructed to review the claims already submitted.  They identified a number of errors in the original claims, and submitted a recalculated claim to the commissioners.  The commissioners met a claim for periods after 31 July 1993, but refused to meet it in so far as it related to the period prior to 1 August 1993, on the ground that the claim for that period was subject to the three-year cap in s 80(4) VATA.

98.    It was argued on behalf of the university that the new claim was an amendment of the original claims, as the fundamental basis for the new partial exemption calculations was the same as for the original claims.  For the commissioners it was submitted that the VATA did not recognise amended claims.  Every claim was subject to the three-year cap and would not be circumvented by labelling it an amendment to an earlier claim; every claim was a new claim.  Claims might be adjusted if, for example, they contained arithmetical errors, but that was an entirely separate matter.  It was submitted that where an earlier claim had been accepted and paid, any later claim could not be regarded as an amendment.

99.    The tribunal (Mr David Demack, chairman) distinguished between claims made under s 80 VATA which were outstanding, and those which had been completed, for example by having been met or determined in full or for which the time for appealing had expired.  He held that the original claims were all completed claims, such that there was nothing to amend; consequently the later claim could not be an amendment but was itself a new or original claim.

100. In the second tribunal decision, John Martin Group (no 19257), the tribunal (T Gordon Coutts QC, chairman) cited University of Liverpool with approval.  In circumstances where the letter claimed by the commissioners as being the decision on an original claim was held not to have been such a decision, so that it did not give rise to finality on the basis of not having been appealed, the tribunal held that a later amendment was an adjustment of an existing claim.

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.

102.We do not accept that the Tribunal has no jurisdiction.  The jurisdiction of the Tribunal is conferred by s 83(1)(t) and encompasses the claim made under s 80.  It is in our view inherent in that jurisdiction that the Tribunal must be able to determine, in case of dispute, the nature, scope and extent of the claim or claims before it, and the time at which a relevant claim has been made.  That, in our judgment, must include whether claims that are made at different times are separate claims or whether they are a single claim which is made at the time of the earlier one.  That is a question of fact and law that the Tribunal must concern itself with in the exercise of its jurisdiction under s 83(1)(t).

103.This is not a matter of the exercise of any discretion on the part of the Tribunal, nor is it concerned with the supervision of the exercise of a discretion on the part of HMRC.  We do not consider that the Tribunal has a discretion to allow an amendment; there is nothing in the VATA to permit such an exercise.  Nor do we make any finding as to whether HMRC have a discretion or, if so, whether the Tribunal can review the exercise of any such discretion.  Both parties reserved for further argument their positions on the question whether the Tribunal had such a jurisdiction.  What we do find is that the Tribunal does have a relevant jurisdiction in this respect, namely to determine for the purpose of s 83(1)(t) simply whether there is, as a matter of fact and law, one claim or two, and when the claim or claims must be regarded as having been made.

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.

105. We have of course reached our conclusion on a different basis, and we do not therefore have to consider the public law aspects that would have required further submissions of the parties.  We mention it only because Mr Peacock did refer to Oxfam, albeit briefly, when addressing us on the question of our jurisdiction generally.  He referred in particular to para [63] where Sales J refers to the words “with respect to” in s 83(1) appearing to him clearly wide enough to cover any legal question capable of being determinative of the issue, as there was in that case, of the amount of input tax which should be credited to a taxpayer, including both questions of contract and of legitimate expectation.  We have ourselves construed s 83(1)(t) as giving us the jurisdiction to consider the nature of a section 80 claim before us, and we do not need to address the public law questions arising out of Oxfam.  We have not thought it necessary in this respect therefore to seek any further submissions on Oxfam in reaching our own conclusion on the nature of the Tribunal’s jurisdiction.

The nature of the claims

106. We do not consider, and this was accepted by Mr Peacock, that either University of Liverpool or John Martin Group are authority for any proposition that the determining factor is whether the original claim has been completed, in the sense used in those cases.  Whilst it is accepted that if an original claim has ceased to have currency then no purported amendment can revive that claim and become part of it, the converse does not hold true.  Where an original claim is uncompleted, it is not the case that every subsequent claim expressed to be an amendment is such.  That depends on the nature of both the original claim, and the later purported amendment.

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.

108.The 2009 Demand identified, through the methodology set out in  a letter from PricewaterhouseCoopers to HMRC letter of 27 March 2009, the “wages element paid to temporary workers not previously identified” and the proportion that number bore to net business turnover for 1991-93.  The average of these percentages was then applied to periods 1973 – 1990 to calculate the “wages element” for which a claim had not at that stage been submitted.  Applying again the appropriate VAT rate gave the amount of VAT over-declared, but not yet claimed.  The letter concludes by asking that it be accepted as notification of output tax over-declared in addition to the values claimed in the 2003 Claim (as that had been amended by letter dated 10 March 2009, which amendment has been accepted by HMRC).

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).

110. There is no definition of “claim” in VATA, nor any provision for amendment of a claim.  The starting point, therefore, we think is that any assertion of a right to repayment must be regarded as an individual, discrete claim, separate from any other, unless it is shown to be in essence as one with an earlier claim.

111.That test, in our view, will be satisfied only if the later claim arises out of the same subject matter as the original claim, without extension to facts and circumstances that fall outside the contemplation of the earlier claim.  Without deciding matters outside of this appeal, we consider, for example, that this would generally include cases where a particular computation was not made at the time of the original claim, but the subject matter of the claim was sufficiently identified for such a calculation made subsequently to be related back to the original claim.  Simple calculation errors would similarly be included.  It should also cover, we think, cases where particular items within the category of the subject matter of the original claim are unknown or not fully identified at the time of the original claim, and would but for that fact have been included in the original claim, but only subsequently come to light.

112. The line in each individual case will be for the tribunal, on the particular facts of the case before it, to draw.  What is necessary is for the tribunal to determine the subject matter of each claim.  This cannot, in our view, be cast too wide, as that would permit claims that are clearly discrete on any analysis potentially to be drawn in.  Thus, it would not be right, in our view, to regard a later claim as an amendment to an earlier one simply because it relates to the same period, is a claim under the same statutory provision, or relies upon the same legal argument or the same error on the part of the taxpayer.  It follows also that no combination of these factors would result in a later claim being treated as part of an earlier one.

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.

114. For the reasons we have given, therefore, we conclude in relation to issue (2) that the 2009 Demand was a separate claim made on 27 March 2009, and was not an amendment to the 2003 Claim.

Issue (3): Availability of unjust enrichment defence

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.

117. This issue turns therefore on the effect of two breaches of EU law by the UK, one in relation to unjust enrichment, the other the three-year cap.  This requires some historical context.

118. Up to July 1996 claims for repayment of VAT overpaid by mistake were subject to no time limitation in the period for which the claim could be made, as long as the claim was made within 6 years of the date the mistake was discovered, or could with reasonable diligence have been discovered (VATA, s 80(4), (5) prior to amendment by FA 1997).  On 18 July 1996 H.M. Paymaster General announced that, in light of increasing amounts of revenue at risk as a result of retrospective claims, a three-year limitation period would be introduced with effect from the date of the announcement.  On 3 December 1996 Parliament passed a resolution pursuant to the Provisional Collection of Taxes Act 1968 that the three-year cap was imposed with retrospective effect from 18 July 1996.  By FA 1997, s 47(2) s 80(5) was repealed, and s 80(4) was replaced, with the same retrospective effect, so as to provide that the commissioners were not liable to repay any amount paid to them more than three years before the making of a section 80 claim.  Certain transitional provisions applied to legal proceedings brought before 18 July 1996.  However, there was no transitional period for claims.

119. This absence of a transitional period was challenged in the ECJ in Marks & Spencer 1.  The court held that, whilst time limits on the period for which claims could be made were not in themselves incompatible with the principle of effectiveness, this was conditional not only on the new limitation period being reasonable but also that transitional arrangements were included allowing an adequate period for claims under the original provisions to be made.  Member States were required as a matter of principle to repay taxes collected in breach of EU law, subject only to the fixing in advance of a reasonable limitation period (see Judgment, [36] – [39]).  Accordingly, the way in which the UK’s three-year cap had been introduced was incompatible with the principles of effectiveness and legitimate expectation.

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.

121. Parliament then did subsequently act, to provide by s 121 FA 2008 that the three-year cap did not apply to claims made before 1 April 2009, and in respect of accounting periods ended before 4 December 1996.  That provision came into force on 19 March 2008.  The 2009 Claim and the 2009 Demand were each made within this new time limit.

122.  A defence of unjust enrichment was originally introduced in 1989.  In the 1994 VATA consolidation it was included in s 80.  However, until 26 May 2005, s 80(1) applied only to so-called payment traders, that is those who had paid an amount to the commissioners by way of VAT, but which was not VAT due to them, and who were thus entitled to a repayment on making a section 80 claim, and not to repayment traders, who would not have made any overpayments, but who would have under-claimed for input tax recovery.  This led Marks & Spencer, once again, to complain that the defence did not operate so as to treat all traders alike, and to question whether this was a breach of EU law.

123. This question was referred by the House of Lords to the ECJ in Marks & Spencer 2.  So far as is material to this case, the court held:

(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]).

124. The consequence, therefore, was that the unjust enrichment defence in its then current form and context had been held to be unlawful, and of no effect.  The response of the government was contained in s 3, F(No2)A 2005.  This introduced amendments to s 80 VATA to eliminate the different treatments of payment and repayment traders, thus remedying the infringement of EU law principles identified in Marks & Spencer 2.  The amendments had effect for claims made on or after 26 May 2005 whenever the event occurred in respect of which the claim was made.

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.

127. Mr Peacock also submitted that if section 121 FA 2008 were to be refined so as to put taxpayers in the position they would have been in if their claims had been made prior to 26 May 2005, this would also have the effect of eliminating a distinction between those who made claims before that date, and those who made claims after it.  He argued that there was no principled basis for any such distinction, pointing to the difference in this very case between the treatment of the 2003 Claim and the 2009 claims.

128. Put in this way, it seems to us that the issue with which we are concerned is whether, in the context of an unlawful three-year cap, in enacting the extended period for claims to be made before being subject to the three-year cap Parliament ought to have done so in a way that, as regards the unjust enrichment defence, would have put claimants back in the position they would have been in if their claims had been made at a time when the unjust enrichment defence was unlawful and ineffective.

129. Ms Whipple took us to the opinion of the Advocate-General (Jacobs) in Weber’s Wine World.  As there is no dispute on the general compatibility of an unjust enrichment defence with EU law, we need refer only to the passage in the opinion which deals with retroactive effect ([62] – [69]):

“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.”

130. In its judgment in Weber’s Wine World the ECJ adopted a similar line of reasoning to that of the Advocate-General.  A Member State may resist repayment of overpaid tax where it has been established that the charge had been borne entirely by someone other than the taxable person and reimbursement would constitute unjust enrichment of the taxable person (Judgment, para 94).  However, the mere passing on of the charge is not enough; the degree of unjust enrichment must, through economic analysis, be established (para 100).  On retroactive effect of an unjust enrichment defence, the Court held that such a measure does not itself amount to an infringement of Community law, where the measure is not aimed specifically at forestalling the effects of a judgment of the Court precluding the maintenance of a particular tax as contrary to Community law.  The Court’s judgment supports the views expressed by the Advocate-General; in particular, the finding of the Court on retroactivity would be incompatible with the existence of any legitimate expectation of a right to be unjustly enriched.

131. What is clear from the Advocate-General’s opinion is, firstly, that the unjust enrichment which a defence is intended to preclude can only arise as a consequence of the claim; in other words it is the satisfaction of the claim that would give rise to the enrichment, so that there can be nothing incompatible about a provision that applies prospectively to claims made after a certain date.  Secondly, there is in any event no legitimate expectation of an unjust enrichment; the very concept of legitimacy cannot embrace what is unjust.  Furthermore, we agree with Ms Whipple when she submits that if it is legitimate for a measure to have retroactive effect, and to depend on the timing of a making of a claim by a particular date, irrespective of the period to which the claim relates, that necessarily involves some potential claimants falling on the right side of the line, and others on the wrong side of the same line.  That therefore could not be a breach of the principle of equal treatment.

132. What we are concerned with, however, is the impact or otherwise of the introduction of an unlawful three-year cap, and the way in which that illegality was addressed.  This depends in our view on the nature of the illegality.  The three-year cap in its original form was found in Marks & Spencer 1 to be incompatible with the principles of effectiveness and legitimate expectation only on the basis that it did not include transitional arrangements allowing an adequate period after the enactment of the new legislation for lodging claims for repayment which persons were entitled to submit under the original legislation.  Marks & Spencer 1 did not require the introduction of a cap to be accompanied by a provision requiring claimants to be put in precisely the position they would have been in if their claims had not been prevented by the absence of a transitional period.

133. As regards the principle of effectiveness, what Marks & Spencer 1 required was that taxpayers seeking repayment of overpaid VAT should not have their remedy curtailed by a cap introduced without giving them the opportunity to claim in a period under the previous law.  What Mr Peacock’s argument amounts to is that a taxpayer’s rights can only in these circumstances be given effect if the taxpayer is also able to avail himself of a regime free of an unjust enrichment defence.  In our view, on the authorities, that is not an argument that can be sustained.  An argument that FA 2008 ought to have preserved a right to repayment untrammelled by the defence of unjust enrichment can only be made out if such a right can be found to exist as a matter of EU law.  In our judgment the authorities admit of no such right.  It is clear that the principle of effectiveness is not breached by a defence of unjust enrichment that is itself compatible with EU law.  A taxpayer has an effective remedy even if that remedy is subject to such a defence.

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.

135. Similarly, a taxpayer cannot have a legitimate expectation that the failure of the legislature to provide for a transitional period for the making of claims outside the three-year cap would enable a claim to be made without being subject to the unjust enrichment defence.  As Advocate-General Jacobs said in Weber’s Wine World, legitimacy cannot embrace what is unjust, and consequently there can be no legitimate expectation of unjust enrichment, nor, we would add, any legitimate expectation of a claim being treated as not subject to a defence of unjust enrichment where it is so subject by virtue of provisions of national law, such as the amended s 80 VATA, which are themselves compatible with EU law.

136. Accordingly we conclude that HMRC can rely on the defence of unjust enrichment in relation to the 2009 Claim and the 2009 Demand.

137. Although the resolution of issue (3) depends on a determination of a question of EU law, neither party urged us to refer any question to the Court of Justice, and we have not found it necessary to do so.  In our view the principles upon which we have decided issue (3) are sufficiently clear so as not to require us to make a reference.

Summary of our determinations

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.


139. In the circumstances of appeal number LON/2004/0130, which are “current proceedings” for the purpose of Schedule 3 to the Transfer of Tribunal Functions and Revenue and Customs Appeals Order 2009, the parties agreed that the most appropriate costs rules to apply are those in Rule 29 of the Value Added Tax Tribunals Rules 1986.  We considered that such a direction would ensure that proceedings are dealt with fairly and justly, and accordingly we directed, pursuant to para 7(3) of Schedule 3 to the 2009 Order, that Rule 29 of the 1986 Rules shall apply, and that Rule 10 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 shall not apply, in respect of that appeal.  Appeals numbers TC/2009/14542 and TC/2009/15468 are not “current proceedings” but have been allocated to the Complex category.

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.

Application for permission to appeal

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.









RELEASE DATE: 24 March 2011



[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].


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