Adecco’s argument was that it does no more than introduce candidates to clients and provide ancillary (in particular, payment) services. It is the temps themselves, and not Adecco, who supply their work to the clients.

On that basis, Adecco claimed that VAT is not payable on the totality of the sums that it receives from clients (which in large part represent payment for the temps' services), but only on the element attributable to the introduction and ancillary services that it supplies itself.

HMRC, on the other hand, took the view that Adecco is obliged to account for VAT on everything that it is paid by a client. The temps' services, according to HMRC, are supplied to clients by Adecco.

Both a First Tier Tribunal (FTT) and an Upper Tribunal had previously agreed with HMRC, and Adecco challenged their findings at the Court of Appeal [Adecco and others and HMRC [2018] EWCA Civ 1794].

The issue was the extent to which the fees that Adecco charges in connection with temps who are not its employees are subject to VAT. This concerned a particular category of ‘non-employed temps’, who are on the books of Adecco but are not considered to be employed by that company. Adecco may introduce them to clients looking for a temporary worker to undertake an assignment. The temps are not obliged to accept any assignment offered and Adecco is not obliged to find them an assignment.

Nevertheless, Adecco undertakes with these individuals to pay them for the work they do for Adecco's clients and is classed as their 'employer' for various regulatory matters, including the working time regulations and payment of PAYE/NIC. Adecco's payment by its clients will be periodic and normally calculated as an amount representing the payment Adecco must make to and on behalf of the temp plus a commission element.

The Upper Tribunal had found that ‘Adecco made a supply of the provision of the non-employed temps to the clients in return for the total fees paid by the clients’ and now the Court of Appeal agreed, dismissing Adecco’s appeal.

The reasons included the fact that it was Adecco which had the contract with the client – the temps did not supply their services under contracts with the clients as no such contracts existed.

Although the contract between Adecco and a temp referred to the temp undertaking an assignment ‘for a client’ and providing services ‘to the client’, it also spoke of the client requiring the temp's services ‘through Adecco’ and of the temp being supplied ‘through Adecco’.

In addition, Adecco conferred control of the temps to the clients, and the company paid temps on its own behalf, not as agent for the clients.

The court said that Adecco ‘by no means dropped out of the picture once it had introduced a temp to a client. It was responsible for paying the temp (and for handling national insurance contributions and the like) and had to do so regardless of whether it received payment from the client and even if the client had rejected the temp in the first two hours and so escaped any liability’.

Although Adecco did not often need to exercise them, it also enjoyed rights of termination and suspension, and it was to Adecco (not the client) that a temp undertook not to take unauthorised leave.

The court pointed out that Adecco did not perform just administrative functions in relation to the temps, and while it charged a client a single sum for each hour a temp worked. It did not split its fees into remuneration for the temp and commission for itself.

The judge concluded: ‘In all the circumstances, it seems to me that, both contractually and as a matter of economic and commercial reality, the temps' services were supplied to clients via Adecco. In other words, Adecco did not merely supply its clients with introductory and ancillary services, and VAT was payable on the totality of what it was paid by clients.’

Reed ‘wrongly decided’

As a result, Adecco’s claim has been dismissed. Its arguments were similar to those put forward by another recruitment agency, Reed, which have also been subject to challenge at tribunal and the Court of Appeal stated: ‘Unsurprisingly, the contractual provisions that applied as between Reed and its clients and temps were not identical to those relevant to the present case. I do not think, however, that the distinctions can justify the conclusion that the FTT arrived at in the Reed Employment case. It seems to me, with respect, that the case must be considered to have been wrongly decided.’

Simon Kite, head of Saffery Champness’ professional & consultancy services group, which acts for UK recruiters, commented: ‘The recruitment industry has suffered from a great deal of uncertainty as regards the treatment of VAT in the supply of temporary workers as a result of the Reed and Adecco cases.  In particular, those agency clients that are unable to recover VAT have put pressure on agencies to reduce the level of VAT charged or, at the very least, to file protective claims. 

‘This decision of the Court of Appeal may well provide some clarity to agencies and their clients, although the additional cost for many VAT-averse end users (for example those in the healthcare, financial services or charitable sectors) is so significant that we may not have heard the last on this matter.’

Graham Elliott, who is technical adviser to the Charity Tax Group and director of City and Cambridge Consultancy, pointed out the ‘unhappy fact’ that it was only the original Reed decision which led Adecco to take up its own challenge, which is likely to have significant repercussions for the charity sector in particular.

‘Because of the introduction of various employment regulations which caused the whole contractual basis of providing self-employed temps to charities (and others) to change in response, a massive VAT disadvantage to this form of flexible employment structure has been created, in such a way as to amount to a restrictive practice, particularly of disadvantage to the charity sector.

‘The courts may have made the application of the law clear, but it is now down to the politicians to consider whether changes should be made which can rescue the law from these unintended consequences,’ Elliott said.

Adecco and others and HMRC [2018] EWCA Civ 1794 is here

Report by Pat Sweet