DECISION
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”).
Background
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
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.
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.
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.
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.
Costs
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.
Directions
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.
ROGER BERNER
TRIBUNAL JUDGE
RELEASE DATE: 24 March 2011
