[2010] UKFTT 396 (TC)

TC00678

	Appeal numbers: LON/07/0374, 0430, 0978 

JOINT EMPLOYMENT – outsourcing IT department – whether staff jointly employed – yes – whether separate supply of staff – no – whether abuse – no – whether legitimate expectation that Notice 700/34 applied – no – appeal dismissed

FIRST-TIER TRIBUNAL

TAX 

	CGI GROUP (EUROPE) LIMITED	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

		TRIBUNAL: 	JOHN F AVERY JONES CBE (TRIBUNAL JUDGE)					JULIAN STAFFORD FCA

Sitting in public at 45 Bedford Square, London WC1 on 26, 27 and 29 July 2010

Kevin Prosser QC, instructed by Reynolds Porter Chamberlain LLP, for the Appellant

Philippa Whipple QC, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2010

DECISION

1.	This is an appeal by CGI Group (Europe) Limited against decision letters of 14 January 2007 and 27 April 2007 and an assessment to VAT of 2 February 2007.  The Appellant was represented by Mr Kevin Prosser QC and the Appellant by Miss Philippa Whipple QC.
2.	The issue in this appeal is whether VAT is chargeable on the proportion of the consideration for outsourcing the IT department of Cox Services limited (“Cox”) (now Equity Insurance Group Limited) to the Appellant that is referable to the re-charge of employee costs where the employees are jointly employed by the Appellant as provider, and Cox as recipient, of the service.  The issues include, although the parties are not in agreement about the correct approach (1) whether there is in fact a joint employment, (2) whether there is a single supply of IT services, or whether there is a supply of IT services plus a re-charge of salaries of the jointly employed staff, (3) whether there is an abuse within the Halifax doctrine, and (4) whether the Appellant had a legitimate expectation that Notice 700/34 (“the Notice”) would be applied to the joint employment.  The explanation for the unusual inclusion of item (4) is that at a preliminary hearing Judge Hellier decided that the Tribunal had jurisdiction to consider this issue for the reasons set out in his decision at [2010] UKFTT 224 (TC).
3.	We heard oral evidence from the following witnesses: Mr Neil Utley, chief executive of Cox; Mr David Ivie, Director of Human Resources of the Appellant; Mr Faris Mohammed, Finance Director of the Appellant; Mr John Kennedy, former VAT partner in Deloitte LLP; Mr Keith Gamble-Beresford, Officer of HMRC; and Mr Stephen Keefe, Head of IT of Cox.  The witness statement of Mr Gavin Chapman, Managing Director of the Appellant was accepted.  A second witness statement of Mr Utley was admitted without his being cross-examined on it on terms that we would give it such weight as we considered proper (see paragraph 3(8) below).  There were also 9 bundles of documents and we are very grateful to the Appellants’ solicitors for also providing a CD containing the documents.  We find the following facts (where we say that a witness said something we accept the truth of the statement, unless it is clear from the context that we do not):
(1)	Originally Cox had an in-house IT department.  Mr Utley, the Chief Executive of Cox, explained that their business was insurance and running an IT department with 200 employees was a distraction with items coming up on the board agenda that meant that people could not concentrate on the insurance business.
(2)	An outsourcing arrangement of the IT department was entered into with the Appellant.  All the IT employees were transferred to the Appellant in consequence of the Transfer of Undertakings (Protection of Employment) Regulations 1981 (“TUPE”).  The Appellant immediately offered the employees joint employment with itself and Cox and they accepted by signing a letter (see below).  
(3)	As a result of long negotiations a 75 page Master Services Agreement (plus numerous appendices and schedules that took up three binders in total) was entered into between the Appellant and Cox on 20 May 2004 which included the following terms:
(a)	The Agreement commenced, as a result of a notice being served, on 17 June 2004.
(b)	The term was for a minimum of 10 years.
(c)	The Agreement was for the provision of services (“the Services”) defined as:
“the services detailed in Schedule 2, together with any Additional Services, the Integration Activities, the payroll services detailed in clauses 2.1.4, 2.2 and 2.3 of the Joint Employer Agreement [these are summarised in paragraph 3(4)(b) below] and the Exit Services [which deal with the termination of the agreement] to be provided by the Supplier to the Customer during the Term in accordance with the provisions of this Agreement, as such services may be enhanced, amended, modified, deleted or otherwise altered from time to time in accordance with the terms of the Agreement.”
(d)	Schedule 2 includes the following headings of the Services provided, which are then defined in more detail:
“2.1 Common server services [followed by these bullet points:] Operations; Production control and scheduling; General technical support; Capacity planning; Data base management and support; Online storage management; External storage media management; Off-site media storage management; Centralised printing; Centralised printing fulfilment; Distributed printing; Backup and recovery services
2.2 End user computing [followed by these bullet points:] End user support infrastructure support at agreed locations; Remote user support; lnstalls, Moves, Adds, Changes (lMACs).
2.3 Telecommunications [followed by these bullet points:] Technical support – voice; Technical support – LAN; Network operations; Mobile phone services.
2.4 Application services [followed by these bullet points:] Application emergency, corrective and preventative maintenance; Application development; Application maintenance for third party applications retained by the Customer; Practices and procedures.
2.5 Cross functional services [followed by these bullet points:] Project Management; Service desk support; Incident management; Problem management; Configuration planning; Release management; Request management (request for service); System change management; Facilities management and support; Physical security management; System security management; Enterprise systems management; Disaster recovery; Yearly planning; Procurement; Equipment maintenance; Administration; 3rd party contract administration/ management; Asset management of defined assets.”
(e)	The Services were comprised in three tiers: tier 1 (infrastructure services supporting the hardware), tier 2 (maintenance of existing software), and tier 3 (software development).
(f)	The Services were to be provided in accordance with service levels that were set out in detail.
(g)	For the remainder of 2004 the charge was 1/12 of the transferred budget.   After that the agreement provided:
“…the Charges shall be determined in accordance with the Charging Framework set out in Schedule 7.  Each monthly invoice shall detail: a) the Charges for the said month calculated in accordance with the Resource Volume and Bank of Hours usage anticipated in the Annual Plan; and (b) adjustments to Charges for previous months as required under the procedures set out in Schedule 7, including ARCs/RRCs [these relate to volume changes] and actual hours used from the Bank of Hours.”
(h)	In broad terms, the system of charging is that there is an Annual Base Charge, plus a tier 1 charge (Volume Baseline times Resource Unit Price, with adjustment for volume changes), plus tiers 2 and 3 base charges with provision for adjustment on the basis of hours spent.  A sample invoice specified separately staff salary re-charges (outside the scope of VAT), and other charges (liable to VAT).  Accompanying the invoice is a break-down itemising the base charge and a number of separate headings (for example, in tier 1 desktop), each item broken down between salary re-charge and other charges.
(i)	During the hearing, Mr Mohammed produced schedules of how the charges were computed today.  There were documents in the bundles that suggested that changes had been made to the method since the start of the agreement, although the original method was unclear from the documents.  We infer that the method may have become more sophisticated over time but the basic arrangement was unchanged.  
(j)	The basic charges and volumes are set in negotiations discussed between the parties starting in October and ending in December in each year as a result of which a schedule for the following year is produced.  Monthly invoices are issued on the basis of the schedule and are retrospectively adjusted each quarter for volume changes and time actually spent compared to the projected time.  The schedule comprises the base charge (about 33% of the total), then some 32 headings of specific charges, for example maintaining a specified number of desktop computers at a set charge for each, with adjustment for volume changes with a different additional charge for volume changes up to 15% and between 15% and 30%.  Every item is given a percentage referable to human resources.  In addition there are some “pass through items” such as telecom carrier charges that are added as disbursements (with no HR component applicable).  The bank of hours for tiers 1, 2 and 3 are set with a standard hourly charge (which is higher for tier 1, although the bank of hours for tier 1 is much smaller than for the other tiers), which we infer is an estimate based on an average hourly rate for the employees concerned working on that tier.  At the end of each quarter the monthly invoices for the quarter are adjusted by reference to (i) the actual hours determined from time sheets kept by the joint employees and (ii) any volume changes.  The time sheets record for each joint, and any other, employees (although only joint employees were included in the schedules we saw for October 2009 to March 2010) the time spent on Cox work.  Each employee’s actual cost of employment (including salary, National Insurance and pension contributions, but no overheads) is worked out and an hourly rate for each employee calculated based on a 7.5 hour working day and including an allowance for holidays, training, and an assumed number of sickness days.  The schedule showed the percentage of time each employee worked for Cox which in the six month period concerned varied considerably from less than 10% to 258% (which we assume relates to payments for being on call and overtime), with the majority in the 50% to 80% range.
(k)	The result of the charging method is that for items other than the base charge, which is an estimate made in advance, the bank of hours charge reflects a number of hours taken from time sheets which allocate the type of work concerned at an average cost estimated in advance, rather than an actual time charge for each employee concerned.  This was the method of calculation that Cox wanted.  We infer that the actual cost of the employees is then used for calculating the following year’s average cost of time.  The HR percentage of each item is an estimate made for each year in advance and applied throughout the year.  
(l)	The Appellant indemnified Cox against VAT on the HR component (basically services provided by the joint employees) of the charges, and to the extent that the element liable to VAT exceeded 57% of the total charges.  If the VAT was payable as a result of a change in the law these indemnities were for half the VAT.
(m)	 A term of the Agreement was:
“11.12 To the extent that payments made under this Agreement by the Customer to the Supplier are referable to services provided by a Joint Employee, such payments shall be made to the Supplier in its capacity as agent for the Customer in remuneration of such Joint Employee and not to the Supplier acting as principal on its own behalf.”
(n)	The parties are to comply with their obligations under the Joint Employer Agreement (see paragraph 3(4) below).
(o)	Subject to the Joint Employer Agreement and Schedule 21 [see below] (i) “the appointment of all Supplier Personnel [defined as: any person in respect of whom the Supplier exercises control including, but not limited to the Supplier's directors, employees and agents and the Sub-Contractors of the Supplier, in any such case who are assigned or engaged by the Supplier from time to time to perform the Supplier's obligations under this Agreement] to perform the Services and the nature and duration of their assignment will be at the Supplier’s discretion;” and (ii) “the Supplier Personnel will work under the direction and control of the Supplier at all times, irrespective of where the Supplier Personnel are working.”  
(p)	Schedule 21 included a provision that:
“The Supplier shall procure that all individuals employed by the Supplier where such persons are engaged in the provisions of the Services: 
(A)	will comply with any working practices, regulations or other such codes of behaviour or best practice agreed by the Customer and the Supplier to be appropriate and applicable to those individuals (neither party's agreement to be unreasonably withheld or delayed); 
(B)	will have their background and suitability for the position checked and verified prior to commencing provision of the services in accordance with the Supplier's current procedures, including, but not limited to, taking up references; and 
(C)	the Supplier will comply in all respects with all laws and regulations applicable to it as employer of those engaged in the provision of the services to the Customer.”
(q)	Schedule 21 also provided for the Appellant to endeavour to procure for joint employees that they keep information confidential and comply with restrictions after ceasing to be employed.  The Appellant was not to change the terms of employment of the joint employees without the agreement of Cox during the first six months, and if any were made redundant during this time they would receive the same benefits as there were entitled to before the transfer.  Nor would it dismiss Key Employees (as defined) for 12 months.  Cox could request the Appellant to replace any Supplier Personnel who had shown evidence of incompetence.  On termination the employees would re-transfer to the employment of Cox.
(r)	On termination Cox could engage another party to take over the Appellant’s responsibilities or could bring the IT staff back in-house.
(s)	Nothing in the agreement is to constitute a partnership, association, joint venture or other co-operative entity between the parties or constitute any party the partner, agent or legal representative of the other.  (This contradicts clause 11.12 set out in paragraph (m) above but that is clearly a more specific provision.)
(4)	Scheduled to the Master Services Agreement is the Joint Employer Agreement between the Appellant and Cox (and also an Indian company related to the Appellant).  The Appellant could not find the original but we infer that it was signed as part of the completion of the other agreement.  It provides:
(a)	For the Appellant to endeavour to obtain agreement from the employees transferred to it to enter into a letter agreement scheduled agreeing to the joint employment with Cox.  New employees spending a regular amount of time each month on Cox business (such matter to be determined at quarterly planning meetings between the parties) are to be made joint employees.
(b)	The Appellant as agent is to pay the joint employees, make all deductions from salary, and make all returns relating thereto.
(c)	The Appellant as agent is to deal with all human resource matters, including agreeing contracts of employment, maintaining records, appraisals, training, discipline, making sickness, holiday etc payments, and dismissing employees at its discretion (subject to the Master Services Agreement).
(d)	The Appellant indemnifies Cox against all liabilities to third parties relating to the joint employees, including payment of taxes, and payments arising on termination of employment, and pension payments.
(e)	On a joint employee ceasing to spend a regular amount of time each month on Cox business (determined as above) the parties will discuss the situation with a view to the person becoming employed by the Appellant alone or being made redundant, the Appellant indemnifying Cox against any liability.
(f)	Cox indemnified the Appellant against any liabilities relating to the employees prior to the commencement date.
(5)	Under the letter agreement, that was in fact entered into by all former employees of Cox who transferred to the Appellant’s employment by TUPE, they agreed:
“You are employed by CGI Group (Europe) Limited (CGI) and Cox Services Limited (Cox) as your employers jointly and severally (“the employers”). 
In the event that the performance of your duties under your contract of employment requires you to work wholly on clients other than Cox, then on notice from CGI, Cox will cease to be your employer jointly with CGI and your employer from that date will be CGI solely.”
The employee also agreed to cease to benefit from Cox benefit schemes and to become eligible to join the Appellant’s schemes, except that he could continue in the Cox SAYE scheme, a factor that was regarded as important by the employees.  The letter was signed on behalf of the Appellant and Cox, and the employee signed showing acceptance of the contractual changes.
(6)	The letter agreement was made after meetings of the Member Transition Panel between the Appellant’s HR department and representatives of the employees, who were kept informed by the minutes of the meetings being available, reporting back by the representative and by a Transition Update in the form of questions and answers.  The answer to the question “Transferring—what does it mean to me?” was “in summary, your role and terms of employment transfer to CGI, the IT function moves from being a cost centre to being a profit centre, and we implement a service level agreement.”  There was also a one-to-one meeting with each employee and a member of the Appellant’s HR department.  It was explained that the Appellant would be the main employer and that the Appellant would act as agent for Cox.  Some employees of the Appellant working on the contract with Cox became joint employees.
(7)	The parties had compared the usual terms of employment of the Appellant and Cox and had decided on an item by item basis which one applied.  Normally for the more important matters (such as working hours, overtime, cars and mileage rates, long-service and retirement awards, life insurance, private medical cover, redundancy terms, notice periods, holidays, sick leave, expenses) this was the Cox conditions, but some variations were made (such as pay date, stock options, staff discounts, special leave, childcare, financial assistance with training, eye care vouchers).  The employees were fully aware of the changes.  As mentioned, joint employees, both the original ones and new ones, could participate in the Cox SAYE scheme and also the discounts on car and home insurance.  The vast majority of the employees continued to work at Cox’s premises.
(8)	Mr Utley was asked who in practice he contacted in an IT emergency, to which he replied that there were standard procedures in which the Appellant was always involved.  He expanded on this in a subsequent witness statement that, despite objections by Miss Whipple, we admitted on the basis that we would give it such weight as we considered proper since he was not available for cross-examination that day, saying that if the problem was urgent he would speak directly to one of the employees without involving the Appellant.  He also said that while working from home he had direct access to two people who could help with an IT problem.  We also admitted a witness statement by Mr Stephen Keefe, Head of IT for Cox (but not a joint employee), who was cross-examined, who said that the correct method was for the person to speak to the IT helpdesk, or to escalate the problem to him, although occasionally and informally someone in the IT team would be contacted directly.  He preferred use of the formal methods so that statistics could be kept.  We have no hesitation in accepting this evidence.  It is human nature to reach for the nearest IT person and ask for help with an urgent problem, but this is not part of the normal process.  In other words, both in accordance with the documents and in practice, Cox does not exercise any control over the joint employees, except informally and occasionally if an emergency arises. 
4.	Mr Prosser QC, for the Appellant contends:
(1)	Joint employment can exist, as in the case of partners acting as employer.  There is no need for each partner to be involved, and in the case of a limited partnership the limited partner could not be involved.  Whether there is a joint employment should be determined by looking at the relationship between the two employers on the one hand and the employee on the other.
(2)	The VAT analysis depends on the contractual position, which was that there was a joint employment and payment of the employees by the Appellant as agent for Cox.  See Cantor Fitzgerald, Case C-108/99, [2001] STC 1453:
“31. It is true that Wako could have remained a tenant and sub-let the property to CFI for a lower rent than that which it had to pay the landlord or that it could have paid compensation to the landlord so that the latter would accept early termination of the lease. In both cases, the economic impact would have been comparable to that of the transaction at issue in the main proceedings, without the parties concerned having to pay VAT.
32. However, that does not justify interpreting Article 13B(b) of the Sixth Directive so as to mean that it also applies to a supply of services that does not include the assignment of a right to occupy property.
33. An approach of that kind would be contrary to the VAT system's objectives of ensuring legal certainty and a correct and coherent application of the exemptions provided for in Article 13 of the Sixth Directive. The Court observes in that connection that, to facilitate the application of VAT, it is necessary to have regard, save in exceptional cases, to the objective character of the transaction in question (see Case C-4/94 BLP Group [1995] ECR I-983, paragraph 24). A taxable person who, for the purposes of achieving a particular economic goal, has a choice between exempt transactions and taxable transactions must therefore, in his own interest, duly take his decision while bearing in mind the neutral system of VAT (see, to that effect, BLP Group, cited above, paragraphs 25 and 26).”
Similarly in Customs and Excise Commissioners v Plantifor [2002] 1132 it was the contractual position that was decisive.
(3)	It cannot be an abuse for a transaction to be structured so that a payment is a disbursement instead of consideration for a supply.  The ECJ in Halifax accepted at [73] (quoted in paragraph 21 below) that the parties can structure their transactions to limit their tax liability.  Nor can it be an abuse to apply the provisions of the Notice.  It is accepted that the essential aim of the joint employment was to prevent VAT being charged on the part of the consideration referable to the re-charge of salaries.
(4)	The Appellant relied on the Notice in entering into the arrangements.  It would be an abuse of power for HMRC to charge VAT on the re-charge of the salaries.  The Notice applies to all cases of joint employment and the analysis cannot change because there is in addition a supply of other services at the same time.
5.	Miss Whipple QC, for HMRC contends:
(1)	Whether there is joint employment does not depend on the contractual position but on the true relationship.  There needs to be the irreducible minimum of mutuality of obligation and control by Cox for it to be an employer (Montgomery v Underwood (2001) ICR 819).  On the former, Cox does not guarantee any work because one of the terms is that the employment with Cox ceases when the duties require work wholly on clients other than Cox.  There was no work for the employee to do as an employee of Cox as all the work for the benefit of Cox is done as employee of the Appellant.  On control, everything is in the hands of the Appellant which had indemnified Cox against all normal employer liabilities.
(2)	By analogy to the single or multiple supplies authorities, it is necessary to start by analysing the essential features of the transaction (College of Estate Management v Customs and Excise Commissioners [2005] STC 1597 at [12]).  The Appellant uses its own staff to provide a supply of the Services.  Even if the staff were jointly employed they were not working for Cox in this respect.  Cox does not have the capacity to make the supplies which its employees are engaged in making.  The Appellant receives consideration for supplying the Services, not in part a reimbursement for staff costs.
(3)	On abuse it is contrary to the purpose of the legislation if salary costs are not included in the consideration for the supply of a single service.  If Cox is an employer and there is no single supply of the Service then art 4(4) of the Sixth Directive is being abused.  The essential aim of the transaction was clearly to obtain a tax advantage.
(4)	For legitimate expectation to arise there must be a clear and unequivocal promise on which the person relies.  There is no legitimate expectation that a public authority will act unlawfully.  The Notice deals with a supply of staff and draws a distinction between a supply of staff and the use of staff under the supplier’s direction to make a supply of services.  Here the latter applies.  The Tribunal’s jurisdiction was on the basis of Human Rights law which expressly allows a state to secure the payment of taxes, which is the case here.
6.	As already mentioned, the approach of the parties is different: Mr Prosser starts with whether there is joint employment, from which the VAT result follows, while Miss Whipple starts with the VAT analysis which is unaffected by whether there is joint employment, although her preferred approach is that there is not.  After that, they both accept that the issues of abuse and legitimate expectation may arise depending on the answers to the previous issues.  We shall return to which approach we prefer but we shall in any event first consider whether there is in law a joint employment.
Joint employment
7.	It is common ground that one can have joint employment; employment by a partnership being a common example.  This is so even though one of the partners is a limited partner precluded from taking part in the management of the partnership business.  Mr Prosser concentrates on the relationship between the two employers together and the employee; and Miss Whipple concentrates on the relationship between Cox and the employee in asking whether the irreducible minimum of mutuality of obligation and control is present as between Cox and the employee.  This is that (a) the servant agrees that in consideration of a wage he will provide his own work and skill in the performance of some service for his master (“mutuality of obligation”); and (b) he agrees, expressly or impliedly, that in the performance of that service he will be subject to another’s control in a sufficient degree to make that other his master (“control”) (Montgomery v Underwood (2001) ICR 819).  While we consider that Mr Prosser’s approach is to be preferred, it is also necessary to consider as a first step Miss Whipple’s approach to ascertain whether Cox is an employer at all, or whether it is merely named as such in the documents.
8.	The relevant facts are that the employees were formerly employees of Cox, they transferred to the Appellant by TUPE and a contract was made with each of them after full discussions that they would become employed by the Appellant and Cox jointly and severally.  There was some variation in the terms from the Cox employment terms even though the more important terms remained.  As between the Appellant and Cox, by Schedule 21 of the Master Services Agreement and the Joint Employer Agreement to which the employee was not a party, the Appellant was entitled to do everything that an employer would normally do (including hiring, firing, changing conditions of employment, discipline, and training) and paying them, even to the extent that if Cox had evidence of an employee’s incompetence it had to request the Appellant to replace the employee; and the Appellant has indemnified Cox against any liability in respect of the employees.  Even in practice we have found that Cox did not exercise any control over the employees.  Other benefits arise to the employee, such as membership of the Cox SAYE scheme.  There is nothing unusual (as a matter of employment law) in someone who was undoubtedly originally an employee of Cox remaining so when doing the same work as before in Cox’s office.  Cox might also have liabilities to an employee and would be dependent on the Appellant’s ability to pay under its indemnity.  
9.	On mutuality of obligation, while a term of the contract is that the employee might cease to be employed by Cox if he was required to work wholly on clients other than Cox, this does not prevent him from being an employee of Cox unless and until that event occurred.  On control, the facts are that the employee has freely agreed to Cox being an employer, that any restriction on acting as employer is contained in an agreement between the Appellant and Cox to which the employee is not a party.  If, in breach of the agreement with the Appellant, Cox did exercise control over the employees we do not consider that the employee could deny their right to do so.  There is nothing as between Cox and the employee that limits Cox’s right to exercise control over the employee.  Accordingly, as between Cox and the employee the irreducible minimum is satisfied.
10.	Having decided that the employee is an employee of Cox there is no doubt that he is also an employee of the Appellant.  Looking at the two employers jointly we do not consider that it matters how they agree between themselves that the obligations are split between them. 
11.	Accordingly we consider that the joint employees are in law the joint employees of the Appellant and Cox.
VAT analysis
12.	It is at this point that the parties’ approach diverges.  Essentially Mr Prosser contends that, once it is decided that there is joint employment, the part of the consideration referable to HR component is contractually a payment between joint employers, one of whom has paid the whole salary as agent for the other, and so the payment is outside the scope of VAT.  Miss Whipple contends that one must identify what the payment is for, which she says is for the Services provided in accordance with the Master Services Agreement.  In order to be able to agree to supply the Services it must be using its own employees.  It makes no difference, she says, that part of the consideration is computed by reference to actual salary costs; it is no different from a solicitor or accountant charging a client on the basis of time spent by an employee (as in Rowe & Maw v Customs and Excise Commissioners [1975] STC 340).  Mr Prosser in reply gave the hypothetical example of Cox retaining the employees and making an agreement for someone to manage the employees (with the consent of the employees, if that is necessary), where the charge made by the other party was for the service of managing the employees, and the payment of its employees’ salaries by Cox would be outside the scope of VAT in the normal way.  We agree that this is the VAT result of such an arrangement.  He contends that the result is the same in this case.  The parties are therefore starting at opposite ends of a spectrum: Miss Whipple is contending that this is effectively a normal outsourcing with the Appellant using its own staff, and it is irrelevant that they may also be employed by Cox; and Mr Prosser that the Appellant is effectively managing Cox’s staff who are working for Cox’s benefit in order to supply the Services. 
13.	The correct approach is summarised by the Court of Appeal in Tesco v Customs and Excise Commissioners [2003] STC 1561:
“[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.'”
The reference in 3 above to the advocate General’s Opinion in Mirror Group is:
“27. In order to identify the key features of a contract, however, we must go beyond an abstract or purely formal analysis. It is necessary to find the contract's economic purpose, that is to say, the precise way in which performance satisfies the interests of the parties. In other words, we must identify the element which the legal traditions of various European countries term the cause of the contract and understand as the economic purpose, calculated to realise the parties' respective interests, lying at the heart of the contract. In the case of a lease, as noted above, this consists in the transfer by one party to another of an exclusive right to enjoy immovable property for an agreed period.
28. It goes without saying that this purpose is the same for all the parties to the contract and thus determines its content. On the other hand, it has no connection with the subjective reasons which have led each of the parties to enter into the contract, and which obviously are not evident from its terms. I have drawn attention to this point because, in my view, failure to distinguish between the cause of a contract and the motivation of the parties has been the source of misunderstandings, even in the cases under consideration here, and has complicated the task of categorising the contracts at issue.”
14.	We consider that Mr Prosser is right in contending that it is necessary to start by analysing the contractual position, although we do not agree with him that once we have decided that there is joint employment the VAT result follows.  Nor do we agree with Miss Whipple’s economic substance approach of saying that outsourcing always involves a single supply of services.  One must start with the contractual position and then test whether this really reflects “the precise way in which performance satisfies the interests of the parties.”  The Master Services Agreement is an agreement for providing the Services in accordance with service levels.  So far as the staff are concerned the following provisions are relevant:
(1)	 At the start the employees working on the services supplied under the Master Services Agreement were Cox’s former employees who became the Appellant’s employees by TUPE and then Cox’s employees jointly by agreement.  The Appellant must not change their terms of service in the first six months without Cox’s consent.  The Appellant could not dismiss Key Employees (as defined) in the first 12 months.
(2)	By agreement between the two employers, new employees spending a regular amount of time each month on Cox’s business are to be made joint employees.  And on ceasing to spend a regular amount of time each month on Cox’s business there is provision for discussions leading to their becoming the Appellant’s sole employees or being made redundant.  By agreement with the employee if the performance of the duties requires a joint employee to work wholly on clients other than Cox then on notice from the Appellant, Cox ceases to be his employer jointly with CGI and the employer becomes the Appellant solely.
(3)	The Appellant has control over all aspects of the employment of joint employees.
(4)	The Services are provided through Supplier Personnel defined as any person in respect of whom the Supplier [the Appellant] exercises control including, but not limited to the Supplier's directors, employees and agents and the Sub-Contractors of the Supplier, in any such case who are assigned or engaged by the Supplier from time to time to perform the Supplier's obligations under this Agreement.  While not mentioning the joint employees specifically they are included because they are the Appellant’s employees and the Appellant exercises control over them.  Presumably it also includes the Appellant’s sole employees who spend less than a regular amount of time each month on Cox’s business.  The appointment of Supplier Personnel and the nature and duration of their assignment is at the Appellant’s discretion.  Cox could only request the Appellant to replace any Supplier Personnel who has shown evidence of incompetence. 
(5)	The employment costs of joint staff are paid by the Appellant as agent which re-charges an amount that is calculated to reflect the staff time used for Cox’s benefit.
(6)	There is no agreement with Cox to manage the joint staff as such; it is merely a consequence of the staff being under the Appellant’s control.
15.	We do not consider that all these provisions can live together satisfactorily.  If the whole of the employment costs of staff working for Cox’s benefit are paid by the Appellant as agent, this implies that the staff are effectively working solely for Cox when they are working for Cox’s benefit and not for the Appellant, with the result that Cox is responsible for paying them (or reimbursing the Appellant if it pays them).  But if that is the case the terms of the Master Services Agreement do not seem to be consistent with it.  While the Appellant would need to be given power to control the staff, there would surely be no question of its appointing Supplier Personnel and determining the nature and duration of their assignment.  Equally there would be no question of Cox requesting the Appellant to replace any Supplier Personnel who has shown evidence of incompetence.  These are not matters of managing Cox’s staff but of deciding whether they are Cox staff at all.  If the staff are effectively working solely for Cox we would expect the Agreement to provide for the management of the staff as a primary obligation, and to provide the Services in accordance with service levels in so far as their management of the staff made this possible.  We would also expect to find exact reimbursement of the employment costs based on the time spent on Cox business as calculated from the time sheets which are available.  It may be that the Agreement provides for an approximation to this, but it is an indirect one because the basic charge is fixed, volume increases have a fixed HR component estimated in advance, and time charges are at a fixed rate per hour rather than the actual rate of the staff doing the job.
16.	If, on the other hand, one starts with the Appellant agreeing to provide the Services in accordance with the specified service levels, this implies that when doing so the staff are effectively working solely for the Appellant and not for Cox (even though for the benefit of Cox).  The staff are a major ingredient in making this supply.  The Appellant needs to have control over whether a particular member of the staff will work on Cox business or something else, which is consistent with the contractual position of its appointing Supplier Personnel and determining the nature and duration of their assignment.  This goes much further than managing Cox’s staff and demonstrates that whether they are working for the benefit of Cox or someone else, they are working for the Appellant. We consider that this is the substance and reality of the arrangement and paying the staff as agent is not consistent with it.
17.	Miss Whipple based her case on there being a single supply of Services.  We consider that this is an analogy rather than the correct analysis but it is nevertheless a way of testing the conclusion we have reached.  One could ask whether, if what the Appellant contends is a non-supply of staff were a supply, there would be a single supply by the Appellant of the Services or separate supplies of staff and the other services.  The test applied by Lord Slynn, with whom all their Lordships concurred, in Card Protection Plan v Customs and Excise Commissioners [2001] STC 174 at [22] is:
“It is clear from the European Court of Justice's judgment that the national court's task is to have regard to the ‘essential features of the transaction’ to see whether it is ‘several distinct principal services’ or a single service and that what from an economic point of view is in reality a single service should not be ‘artificially split.’ It seems that an overall view should be taken and over-zealous dissecting and analysis of particular clauses should be avoided.”
We consider that the essential feature of the transaction would be that it is a single supply of the Services for which the HR element is an essential element, comparable to the food in the restaurant in Faaborg-Gelting Linien, Case C-231/94, [1996] STC 774, or the course materials in College of Estate Management v Customs and Excise Commissioners [2005] STC 1597.  The economic point of view supports the contractual position that what is being supplied is the Services as a single service.  By analogy, this supports our view that the staff must be working solely for the Appellant in contributing to the supply of the Service and the Appellant is not paying the staff costs as agent for Cox.
18.	This conclusion means that we are ignoring the term of the Master Services Agreement that payments to joint staff are made as agent, and the words “as agent” in the Joint Employer Agreement, but the nature of the agency is unspecified and there is no appointment of the Appellant as agent.  We consider that we are justified in going behind the contractual position to consider the economic purpose, that is “the precise way in which performance satisfies the interests of the parties.”  Mr Utley may as a subjective purpose have wanted the Appellant to manage the employees, but that is not the economic purpose of the contracts. 
19.	Accordingly, our analysis of the contractual position is that the Appellant was providing the Services entirely as a principal and was not acting as agent of Cox when paying the employees.  It follows that VAT is chargeable on the whole of the consideration.
Abuse
20.	In view of our decision on the VAT analysis, abuse in the Halifax sense does not arise.  However we shall briefly deal with this issue on the assumption that we had decided that the VAT analysis was that part of the consideration was a re-charge of the cost of Cox’s employees.  
21.	The ECJ said in Halifax v Customs and Excise Commissioners, Case C-255/02 [2006] STC 919:
70     That principle of prohibiting abusive practices also applies to the sphere of VAT.
71      Preventing possible tax evasion, avoidance and abuse is an objective recognised and encouraged by the Sixth Directive (see Joined Cases C-487/01 and C-7/02 Gemeente Leusden and Holin Groep [2004] ECR I-5337, paragraph 76).
72      However, as the Court has held on numerous occasions, Community legislation must be certain and its application foreseeable by those subject to it (see, in particular, Case C-301/97 Netherlands v Council [2001] ECR I-8853, paragraph 43). That requirement of legal certainty must be observed all the more strictly in the case of rules liable to entail financial consequences, in order that those concerned may know precisely the extent of the obligations which they impose on them (Case 326/85 Netherlands v Commission [1987] ECR 5091, paragraph 24, and Case C-17/01 Sudholz [2004] ECR I-4243, paragraph 34).
73      Moreover, it is clear from the case-law that a trader’s choice between exempt transactions and taxable transactions may be based on a range of factors, including tax considerations relating to the VAT system (see, in particular, BLP Group, paragraph 26, and Case C-108/99 Cantor Fitzgerald International [2001] ECR I-7257, paragraph 33). Where the taxable person chooses one of two transactions, the Sixth Directive does not require him to choose the one which involves paying the highest amount of VAT. On the contrary, as the Advocate General observed in point 85 of his Opinion, taxpayers may choose to structure their business so as to limit their tax liability.
74      In view of the foregoing considerations, it would appear that, in the sphere of VAT, an abusive practice can be found to exist only if, first, the transactions concerned, notwithstanding formal application of the conditions laid down by the relevant provisions of the Sixth Directive and the national legislation transposing it, result in the accrual of a tax advantage the grant of which would be contrary to the purpose of those provisions.
75      Second, it must also be apparent from a number of objective factors that the essential aim of the transactions concerned is to obtain a tax advantage. As the Advocate General observed in point 89 of his Opinion, the prohibition of abuse is not relevant where the economic activity carried out may have some explanation other than the mere attainment of tax advantages. 
76      It is for the national court to verify in accordance with the rules of evidence of national law, provided that the effectiveness of Community law is not undermined, whether action constituting such an abusive practice has taken place in the case before it (see Case C-515/03 Eichsfelder Schalchtbetrieb [2005] ECR I-0000, paragraph 40).
22.	The second of these conditions (para 75) is conceded by the Appellant to be satisfied.  On the first condition (para 74), Mr Prosser contends that it is fully in accordance with the purpose of the Sixth Directive that payments for the supply of services by employees are not within the scope of VAT.  Miss Whipple contends that the reality is that there is a supply of services which should be charged to VAT.  This difference is essentially a difference in starting point.  In order for this issue to be relevant legally there must have been a separation between the services provided by the Appellant and the services provided by the employees, as in Mr Prosser’s hypothetical example in paragraph 12 above.  On that assumption, Miss Whipple could not start with the proposition that there was a single supply of services by the Appellant.  If there were such a separation than we do not consider that for VAT purposes there would be any abuse of the provisions of the Sixth Directive or the national legislation transposing it.  It is fully in accordance with the principles of VAT that the separate supply of the services of an employee is not liable to VAT.  If the issue had arisen we would have concluded that there was no abuse.
Legitimate expectation
23.	We turn to this on the basis that Judge Hellier decided that we had jurisdiction to deal with it.  We consider that this issue does arise.  On Mr Prosser’s approach it would have arisen only if we had found an abuse; but on Miss Whipple’s approach we have found on the correct VAT analysis that VAT is payable on the whole consideration.  Can the Appellant say that it relied on the Notice so that HMRC cannot deny that the re-charge between two employers is outside the scope of VAT?  
24.	The Notice applicable at the time included the following:
“2. Definition
You make a supply of staff for VAT purposes if you provide to another person, for consideration, the use of an individual who is contractually employed by you or is a director of your company. This applies whether the terms of the individual's employment with you are set out in a formal contract or letter of appointment, or are on a less formal basis. The determining factor is that the staff are not contractually employed by the recipient company, but come under the direction of that company. Consideration and value of the supply are explained in paragraph 4.
If your company supplies services, e.g. construction services, to another person but your staff continue to operate under your own direction, this is not a supply of staff, but is a supply of those services. This distinction is significant where the services may be zero-rated or exempt, or when determining whether or not the supply is made in the UK. If you are in doubt about the place of supply of your services, you should refer to Notice 741.
…
6. Joint employment
In cases of joint employment, there is no supply of staff for VAT purposes between the joint employers. Staff are regarded as jointly employed if their contracts of employment or letters of appointment make it clear that they have more than one employer. The contract must specify who the employers are, for example 'Company A, Company B and Company C', or 'Company A and its subsidiaries'.
Staff are not jointly employed if their contract is with a single company or person, even if it requires them to work for other companies. Paragraphs 2 to 4 above therefore apply. It is not accepted that there is joint employment where there is a contract with one company:
•	which lays down that the employee's duties include assisting other companies; or
•	that the employee will work full-time for another; or
•	where the job title shows that the employee works for a group of associated companies (e.g. group accountant).
This is not an exhaustive list.
7. Paymaster services for associated companies
Paymaster services commonly arise in two situations:
•	where employees are jointly employed by two or more companies and one company undertakes to pay all salaries, National Insurance and pension contributions which are then recovered from the other employers; or
•	where each of a number of associated companies employs its own staff, but one (paymaster) company pays all salaries, National Insurance and pension contributions on behalf of the others; each associate then pays its share of the costs to the paymaster.
Recovery of monies paid out by the paymaster in either of these situations is not subject to VAT as it is a disbursement (see Notice 700: The VAT guide paragraph 83). If a charge is made for the paymaster's services to the other companies, over and above the reimbursement of the costs paid out on their behalf, the paymaster must account for VAT on this charge. However, such supplies are disregarded where they are made between companies within the same VAT group registration.”
25.	We find that the Appellant, principally through Deloittes, did rely on the Notice in planning the transaction.
26.	Mr Keith Gamble-Beresford, an officer of HMRC in their Anti-avoidance Group explained the policy in relation to joint employment that where there was a supply of staff and joint employment the Notice applied.  Although he was not personally familiar with University of Glasgow (2005) VAT Decision 19052 and its solution by adopting joint employment, he saw no objection to the procedure, where there was a simple supply of staff unrelated to another supply of services.  
27.	We consider that a reasonable reader of the Notice would understand it as meaning that paragraph 2 makes the distinction between a supply of staff of which “the determining factor is that the staff are not contractually employed by the recipient company, but come under the direction of that company”; and a supply of services where “your staff continue to operate under your own direction” which “is not a supply of staff, but is a supply of those services.”  The term “direction” in the Notice was interpreted by Sales J in R (oao Accenture Services Ltd) v HMRC [2009] STC 1503 at [49]:
“In a situation where elements of control are divided between different persons, the natural meaning of ‘the direction’ (in the phrase, ‘comes under the direction of …’) is the predominant practical power to direct the transferred employee to do things.”
If in accordance with this meaning, there would be a supply of staff and there is joint employment, then there is no supply of staff and any payment for what would have been a supply of staff is a disbursement and not consideration for any supply.  In addition, and unrelated to a supply of staff, a paymaster arrangement between two [associated] separate employers which results in each employer ultimately paying his share is also a disbursement.  Although headed Paymaster services for associated companies Customs wrote to Touche Ross & Co (now part of Deloittes) in 1994 that they did not regard it as limited to connected or associated companies.  This aspect seems to be an example of pure agency.
28.	Applying that to the facts, as between the Appellant and Cox the Appellant had full direction over the staff and Cox has no direction.  Accordingly there was no supply of staff but a supply of other services.  While we have found that there was joint employment this is irrelevant as there is no supply of staff which the joint employment can turn into a non-supply for which the payment is a disbursement.  It remains a supply of other services.  The second bullet point of paragraph 7 is not relevant either as it relates to separate employments, whereas here there is joint employment.  Our conclusion is that the situation in this appeal is outside the terms of the Notice, and accordingly the Notice does not give rise to any legitimate expectation that the joint employment and paymaster services exceptions apply.
29.	This makes it unnecessary for us to consider the authorities on when legitimate expectation can be raised, particularly as Judge Hellier’s reasons for accepting that we had jurisdiction were based on human rights grounds, which do not appear to apply here, rather than common law grounds.
30.	Accordingly in summary our decision is:
(1)	There is joint employment of the staff by the Appellant and Cox;
(2)	The VAT analysis is that there is a supply of services which is liable to VAT in full even though part of the consideration is referable to payments for staff who are jointly employed.
(3)	If the issue of abuse had been relevant we would have found that there was no abuse;
(4)	The Appellant did not have any legitimate expectation that the Notice would be applied in the situation in this appeal.
We dismiss the appeal with costs to be determined in default of agreement by the High Court on the standard basis.
31.	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.

JOHN F AVERY JONES

TRIBUNAL JUDGE
RELEASE DATE: 20 August 2010