VAT Supplies of Services Whether Services of Workers Supplied by Trader Providing Outsourcing

20930

VAT – supplies of services – whether services of workers supplied by trader providing outsourcing service or by employment agencies using that service – the latter – appeal dismissed

LONDON TRIBUNAL CENTRE

ORIEL SUPPORT LIMITEDAppellant

- and -

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMSRespondents

Tribunal:JOHN CLARK (Chairman)

RAY BATTERSBY

Sitting in public in London on 29-30 September, 1-2 October and 4-5 November 2008

Eamon Mc Nicholas of counsel, instructed by bnb Tax Consultants, for the Appellant

Peter Mantle of counsel, instructed by the Solicitor for Her Majesty’s Revenue and Customs, for the Respondents

DECISION

Oriel Support Ltd (referred to in this decision as “OSL”) appeals against two decisions taken by the Respondents (“HMRC”). One was contained in HMRC’s letter to OSL dated 8 December 2006. The other was contained in HMRC’s letter dated 7 December 2006 to another company, UK Labour Ltd. The decision in both letters was that OSL did not make supplies of staff to customers. The letter dated 8 December 2006 also indicated that the invoice presently supplied to employment agencies for payroll could not be treated as a supply for VAT purposes as no supply was made, therefore OSL could not charge VAT on this invoice.

The facts

The text of the Statement of Agreed Facts is set out below, subject to minor editorial changes. In addition we were provided with a number of bundles of documents, including witness statements from Brian Pursey, Mrs Susan Copley and Anthony Borman on behalf of OSL and Christopher Wells and Miss Elinor Crockford on behalf of HMRC. Mr Pursey, Mrs Copley, Mr Wells and Ms Crockford also gave oral evidence. We set out additional findings of fact after the Statement, and where appropriate we consider disputed facts later in this decision.

Statement of Agreed Facts

(1)OSL is a limited company, incorporated in England & Wales on 3 December 2004 under company number 5304654.

(2)On 21 April 2005, OSL applied to HMRC to be registered for VAT, with effect from 1 May 2005. The VAT 1 was signed by Brian Pursey, a director. OSL was subsequently registered for VAT with effect from 1 May 2005.

(3)On 12 January 2006, Miss Elinor Crockford of HMRC visited OSL to enquire into its VAT declarations. Miss Crockford was an officer of HMRC’s Labour Providers team, based at Swindon VAT office, dealing in particular with tax and VAT issues in the employment industry. At that visit OSL provided Miss Crockford with a copy of a document which was referred to by OSL as a ‘Complete Financial Outsourcing’ agreement (‘CFO’).

(4)The CFO referred to an ‘Operating Manual’, a manual produced by OSL.

(5)OSL invoiced end users of the services of the workers for the price of the labour provided to the end users and VAT was calculated and charged to the end users by reference to that price.

(6)Further visits to OSL were made by Miss Crockford during 2006. HMRC formed the view that OSL and the employment agencies that had contracted with it were accounting for VAT incorrectly.

(7)During November and December 2006, Christopher Wells, an officer of HMRC in the Labour Providers team based at Harlow VAT office, interviewed directors of three employment agencies – Technical Moves Ltd, Bespoke Recruitment Ltd and UK Labour Ltd – who used OSL’s services.

(8)On 7 December 2006, Mr Wells sent a ruling letter to UK Labour Ltd, an employment agency which had contracted with OSL, in which he set out decisions made by HMRC as recorded in that letter.

(9)On 8 December 2006, Miss Crockford sent a ruling letter to OSL in which she set out decisions made by HMRC in relation to OSL, as recorded in that letter.

(10)On 20 December 2006, OSL appealed against Miss Crockford’s decisions, notified by her letter dated 8 December 2006, and Mr Wells’ decisions in relation to UK Labour Ltd, notified by his letter dated 7 December 2006.

In the course of the hearing, OSL and HMRC adopted a set of agreed terms to describe the parties involved in the various contracts under review. These were:

(1)The Customer, namely the end user of the services provided;

(2)OSL;

(3)The Agent, ie the employment agency or similar entity. [Note that we do not consider that the use of this term is in any way determinative of the capacity in which the Agent acts, so that this may be either as principal or agent, depending on the effects of the relevant contractual documentation];

(4)The Worker, who could be an employee of the Agent, a self-employed individual, or an individual provided through a “personal service company”.

A significant proportion of the evidence related to the manner in which HMRC had arrived at the respective decisions. In the course of the hearing, the parties agreed that it was not necessary to review this process, which had been examined in other proceedings, and that we should concentrate on the terms of the contractual relationships between the various persons involved, and the nature of the supplies made.
There were no agreed sample documents. We were provided with examples of documentation. We set out below our description based on those examples. The evidence showed that there were two possible sets of circumstances in which OSL became involved. In some cases, the Agent was starting up its business, and entered into a contractual relationship with OSL as part of the process of commencing business. In others, the Agent had a pre-existing business, with the three parties to existing contracts being the Agent, the Worker and the Customer; in those cases, the relationship with OSL was added to those existing contractual relationships. Mr Pursey’s evidence was that currently, ie in 2008, there were 130 Agents with CFOs, and that probably about a quarter, say 30, had had a pre-existing client book.
With some modifications based on the other evidence, we set out Mr Pursey’s description of the way in which the arrangements worked. (We comment below on the effects of the contractual arrangements, so at this point we merely reproduce his views as to those effects, without indicating whether we agree or disagree with those views.) The Agent, acting as a disclosed agent of OSL, identified new Customers. It them referred their details to OSL which in turn determined whether it was prepared to enter into a contract with each of those Customers. If a Customer was approved, the Agent would enter into a contract for the supply of labour as a disclosed agent of OSL, on the basis of the latter’s Standard Terms and Conditions, together with such of the Agent’s own standard terms and conditions as were not inconsistent with those of OSL. The CFO required that the Agent disclosed to the Customer the contractual relationship between the parties. This confirmation was required as part of the “Client Application Form” signed by the Customer.
The Agent employed some individual Workers and engaged the services of others through service companies.
The Worker worked at the premises of the Customer and filled in a time sheet. This was provided to the Customer, who signed it and returned it to OSL. OSL then raised an invoice against the Customer in OSL’s own name, but disclosed the logo of the Agent. These invoices had OSL’s Standard Terms and Conditions on their reverse side.
The sums due under the supply agreement were due solely to OSL. The credit risk associated with the contract was covered by OSL’s credit risk insurance, as shown in the Credit Insurance Schedule to the CFO indicating the Agent’s name, and specifying the “prepayment level cover percentage”, and the “first loss excess on each debtor balance”.
Under the sub-contract agreement between OSL and the Agent, the latter was entitled to a fee (“ the Contract Fee”) for its work equal to the amount invoiced to the Customer, such sum being payable on receipt of payment from the Customer and/or receipt of credit insurance proceeds, if relevant. The invoices from Agents to OSL were prepared by OSL on a “self-billing” basis, following a ruling by Miss Crockford on behalf of HMRC. As required by HMRC, they contained the following statement: “The VAT shown is your output tax due to Customs and Excise”.
OSL agreed to pay the sums due from the Agent to the Workers or their service companies and to account for PAYE as appropriate. These payments were made irrespective of whether the payments due from the Customer had or had not been recovered. OSL raised “payroll invoices” against the Agent in respect of these payroll costs.
The Agent was entitled to an advance payment equal to a specified percentage of its Contract Fee, subject to credit limits. The payment of the payroll costs by OSL was treated as the making of an advance payment to the Agent. Any other fees and charges incurred, in particular the Service Fee, calculated as a percentage of the amount invoiced to the Customer, were similarly treated as advances. A discount charge was also calculated and charged by reference to the amount of the advance payments to the Agent at any one time. All these other items were included in a “Fees and Charges” invoice.
OSL also retained from this advance payment an amount equal to the VAT that the Agent would need to account for in respect of the transaction. This amount was made available to the Agent when its VAT payment fell due.
OSL accounted for the PAYE to HMRC under OSL’s own PAYE reference. (The position relating to payments to sub-contractors is considered later in this decision.)
Under OSL’s internal accounting system, a “Weekly Movement Schedule” was prepared for each Agent, reflecting all the above items and showing other details of the financial and accounting position as between the Agent and OSL. Such Schedules generally covered the provision of Workers to a number of Customers.
As Mr Pursey confirmed, the relationship between OSL and the Agent was governed by the CFO. The main example provided in evidence of a CFO that had been entered into before HMRC’s decision on 8 December 2006 was one dated 12 July 2005 between OSL and a company called Encon Staffing Associates Ltd (“Encon”). (Other examples included in evidence were a CFO entered into on 12 July 2005, the date of OSL’s purchase of the business [see below] from the administrators of a predecessor company, with Ford Recruitment Ltd, and a CFO with New Resources Ltd dated 1 August 2006. The latter contains additional provisions, but the main clauses look similar to those in the Encon CFO.) The “Service” to be provided pursuant to the Encon CFO was defined as: “the complete financial outsourcing services to be provided by [OSL] to the [Agent], as described in the Operating Manual.” With substitutions for the terms defined above, the relevant parts of Clauses 2 and 3 provided:

“2.1 [Encon] agrees to use the Service on an exclusive basis. Whilst this Agreement is in force, every contract that it enters into for the supply of temporary or permanent workers shall be entered into by [Encon] as agent for [OSL], and [Encon] shall disclose to the [Customer] that it is contracting as agent on behalf of [OSL] as principal.

2.2 [Encon] shall ensure that all Contracts entered into are subject to [Encon’s] standard terms and conditions incorporating the Standard Terms. [Encon] shall not amend its standard terms and conditions incorporating the Standard Terms without the prior written consent of [OSL] . . .

. . .

2.4 [OSL] agrees to pay to [Encon] the Contract Fee in respect of each invoice following receipt by [OSL] of the corresponding invoiced Amount or credit insurance proceeds and any excess payment . . . in respect of such invoiced Amount.

2.5 [Encon] has no authority to vary the terms of Contracts, or, save as expressly provided in this Agreement, to act as agent for [OSL] or to incur any liabilities on behalf of or in the name of [OSL] and [Encon] shall not hold itself out or act as [OSL’s] agent save as aforesaid.

3.1 [Encon] agrees to perform, as sub-contractor to [OSL], the obligation under each Contract to find [Workers] to be supplied and/or introduced to the [Customer].

3.2 [Encon] shall enter into contracts, as principal, with [Workers].

3.3 Save for those obligations and liabilities which, under this Agreement, are the express responsibility of [OSL], [Encon] agrees to perform (as sub-contractor to [OSL] so far as entering into contracts with [Workers] are [sic] concerned, but otherwise as agent for [OSL]) all obligations and meet (at [Encon’s] expense) all liabilities under each Contract.

3.4 No separate fee is payable by [OSL] to [Encon] for [Encon’s] services in fulfilling Contracts. Payment for these services is included in the Contract Fee.”

Clause 5 of this CFO provided:

“Complete Financial Outsourcing

“5.1 [OSL] agrees to provide its complete financial outsourcing service, as specified in the Operating Manual, in respect of each Contract notified . . . Invoice(s) rendered to [Customers] will be in the name of and for the account of [OSL] and [Encon] authorises and licences [OSL] to (i) refer to [Encon] as disclosed agent for and on behalf of [OSL] and (ii) use [Encon’s] trading name and trademarks on such invoices for administrative and operational purposes only.

5.2 The fees payable by [Encon] to [OSL] for the performance of the Service, which shall be payable at the times specified in the Operating Manual, are:

5.2.1 (in respect of Services in respect of the supply of Temporary [Workers] only) a fee equal to the total cost (without any mark-up and giving credit for any amounts which are reclaimed) of the payroll service specified in the Operating Manual plus VAT where applicable;

5.2.2 the Service Fee;

5.2.3 all ancillary charges, costs, expenses and disbursements of the Service incurred by [OSL] from time to time plus VAT where applicable, including but not limited to those specified in the Operating Manual.”

The Operating Manual (the main example of which was dated October 2005, although later examples were included in the evidence) contained detailed information relating to the service provided pursuant to the CFO, including descriptions of the practical operation of that service. A schedule to the Operating Manual contained OSL’s “Standard Terms”. (The reference in those terms to another company described as “Oriel”, Oriel Support Services Ltd, appears to be an error, as the latter company had gone into administration on 12 July 2005, a contributory cause having been an error in the calculation of finance advances by its finance provider, and the subsequent tightening of Oriel Support Services Ltd’s financial position to recoup the excess lending. By 25 August 2005, according to a statement produced by the administrators, there was an outstanding VAT debt of approximately £662,000, and a debt of around £1,031,000 to HMRC in respect of PAYE and National Insurance. OSL had purchased the business of Oriel Support Services Ltd on 12 July 2005.)
The Standard Terms were expressed to be supplemental to the Agent’s standard terms and conditions of trading. The October 2005 version included the following terms:

“2 [Workers]

[OSL] contracts as principal with the [Customer] and any reference in the [Agent’s] standard terms and conditions to the [Agent] . . . shall be construed as a reference to [OSL]. [OSL] will use reasonable endeavours to procure that the [Agent] (as its sub-contractor for the purposes of this clause 2) shall introduce to the [Customer] suitable [Workers] to carry out work for the [Customer]. The [Customer] accepts that no warranty as to the suitability of any [Worker] is or shall be given by [OSL]. [OSL] cannot guarantee to find a suitable [Worker] for a vacancy.

3 Payments

3.1 All payments due from the [Customer] shall be due and payable not later than . . .

3.2 The [Agent] has no authority to accept, on behalf of [OSL], any payment due from the [Customer]. Payment by the [Customer] of any amount to the [Agent] shall not discharge the [Customer’s] obligation to pay such amount to [OSL].”

Mr Pursey acknowledged that labour used on a contract could either be employed by an Agent, or be self-employed, or be an individual engaged through a personal services company. In Encon’s “Terms of Engagement for Temporary Workers”, Clause 2.2 provided that:

“For the avoidance of doubt, these Terms shall not give rise to a contract of employment between the Employment Business [ie Encon] and the Temporary Worker. The Temporary Worker is engaged as a self-employed worker, although the Employment Business is required to make statutory deductions from the remuneration in accordance with clause 4.1.”

Neither these Terms, nor Encon’s “Terms of Business for the Supply of Temporary Personnel” entered into between Encon and Customers, made any reference to OSL’s Standard Terms and Conditions, or to OSL’s involvement; however, Encon’s obligations under the CFO included the commitment to ensure that all contracts entered into with Customers were subject to Encon’s Standard Terms incorporating OSL’s Standard Terms. In addition, under the terms set out in the Operating Manual relating to “Client Contracts” (ie contracts with Customers), “[OSL’s] standard terms and conditions must be issued in conjunction with [Encon’s] standard terms.” A further term stated: “The [Worker] shall remain the responsibility of [Encon] with [Encon] overseeing the relationship between the [Worker] and the [Customer] on behalf of [OSL].”
OSL did not have a gangmaster’s licence; Mr Pursey explained that where one was required, it was for the Agent to obtain it.