A recent Court of Appeal case – Adecco v HMRC – clarifies a longstanding question over seemingly contradictory case law on the VAT treatment of employment agency temps. The decision relates to non-employed temps, i.e. individuals provided by the agency to a client who are not employees of the agency but who have contracts with the agency, have no direct contract with the client for whom they work, and are paid by the agency out of a fee paid to the agency by the client.
The question for the court was whether services provided to the client in relation to the non-employed temps was a supply of staff such that the full amount of the client's fee would be subject to VAT, or a supply of introductory services such that only the element of the fee charged for the introduction would be subject to VAT and not the element that reflects the remuneration to be paid to the individual.
In line with HMRC's view set out in its VAT Notice 700/34, the Court found that it was a supply of staff so the fee was fully subject to VAT. The Court also opined that the 2011 First-tier Tax Tribunal decision in Reed v HMRC, in which a contrary conclusion was reached on near identical facts, must be considered wrongly decided.
The lower courts in the Adecco case had not commented on the Reed decision except to suggest broadly that it should be justified on the grounds of factual differences. HMRC had published guidance indicating that it thought the Reed decision should be confined to its facts. Taxpayers had therefore been left trying to assess how the contractual terms in the Reed and Adecco cases differed in order to try to establish which side of the line their arrangements stood.
Although it may be unhelpful for employment agencies and clients of employment agencies that the taxpayers in Adecco lost the case, it is useful to have clarification from the courts indicating that the Reed decision should be ignored.