Adecco UK Ltd and others have lost a case at the court of appeal that has widespread implications on the VAT treatment of temporary workers.

A central point in this case is the fact that it is not only the contractual position that requires consideration, but also the commercial reality of what is happening in practice. In cases where there is a contradiction between the two, the commercial reality takes precedence, but in this case there was considered to be no contradiction.

The contract between temporary worker and Adecco, and the parallel contract between Adecco and its clients both indicated that the temporary worker was working for Adecco, and Adecco was providing temporary staff to its clients. Therefore VAT was payable on the full charge to the client and not just the commission or introductory element.

Customers particularly affected by this decision are those that are restricted in the VAT they can recover and who use temporary workers on a large scale e.g. financial institutions, not for profit entities and colleges and universities, as they will face an increased VAT charge for these services.

Some people may recall the Reed Employment case where the first-tier tribunal agreed that Reed was only providing an introduction service for temp workers, in a situation almost identical to that of Adecco.

Reed was able to charge VAT only on its commission, not to the full fee. HMRC issued Revenue & Customs Brief 32/11 after the decision, stating that they “do not regard Reed as having any wider impact.” The court of appeal in the Adecco case commented that the Reed case was “wrongly decided” so that appears to be the final word…

If your business is affected by this matter, or if you wish to discuss any other related issues in more detail, please get in touch with an expert from our VAT and Indirect Taxes team.