20408

SUPPLY OF SERVICES – Agency providing temporary work – Whether supplying workers as principal 

LONDON TRIBUNAL CENTRE

	HELPING HAND ASSET MANAGEMENT LIMITED	           Appellant

-	and –

	THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents

				Tribunal:	SIR STEPHEN OLIVER QC (Chairman)
						SHEILA WONG CHONG FRICS

Sitting in public in London on 8 and 9 October 2007

Eamonn McNicholas, counsel, for the Appellant

Sarabjit Singh. counsel, instructed by the general counsel and solicitor for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2007

DECISION

1.	Helping Hand Asset Management Ltd (“Helping Hand”), the Appellant, appeals against a decision of the Commissioners in a letter of 18 December 2006.  The decision letter notified Helping Hand that it had wrongly treated itself as the supplier of temporary workers to clients such as construction companies and farming operators.  The proper analysis of the arrangements, said the decision letter, was that the supplies of temporary workers for these clients (“the Clients”) had been made by other “employment agencies”; the supplies of Helping Hand had been limited to the supplies of back-office services to these employment agencies.

2.	The decision had been based on a visit report.  The visit to Helping Hand had been made by two customs officers; also present at the visit had been Mr Andrew David (director of Helping Hand) who gave evidence.  The visit had taken place on 28 June 2006.  The report described the other employment agencies as “labour providers” and the Clients as “end-users”.  The visit report contained the following points:

(1)	The end-users and workers had been sourced by the labour providers. 

(2)	The contract between the labour provider and the end-user had been issued by the labour provider and Helping Hand had had no control over whether such a document was signed or over the content.  

(3)	The worker signed a contract with Helping Hand.

(4)	Checks as to the background, suitability and immigration status of the workers had been carried out by the labour provider whose responsibility those functions were.

(5)	Helping Hand had had a non-recourse factoring arrangement with a factoring company (Bibby Financial Services Ltd (“Bibby”)) and any bad debts had been paid directly by Bibby to the credit insurers.  Otherwise bad debts had fallen on the labour providers.

3.	Helping Hand accepts the accuracy of points (1) and (3).  The others, it says, are wrong.  The visit report had never been agreed by Helping Hand, let alone shown to it.  

The Issues

4.	The law is contained in section 1 of the VAT Act 1994 which sets out the requirements to charge VAT and the liability for VAT.  Subsection (1) provides that VAT shall be charged “on the supply of … services in the UK” and subsection (2) states that VAT on a supply of services is a liability of a person “making the supply”.  The issue for us is to determine the application of section (1) to the particular circumstances of this case.  This requires in the examination of the arrangements relating to the relevant supplies.  The relevant supplies are the provision of workers to end-users, i.e. the Clients, who use the services of the workers in their businesses.

A typical scenario

5.	We start by describing a scenario which we understand to have been typical.  

6.	Helping Hand obtained information that a major refit was to be carried out on the Queen Alexandra Hospital in Portsmouth.  Helping Hand had come by that information through the services of one of two firms with whom it had a contract for the provision of such intelligence; those firms had picked up their data from inspections of planning applications and the like.  Helping Hand paid those firms for this information.  Helping Hand provided the information about the Portsmouth project to (and here we use the terminology adopted by Mr Sarabjit Singh for the Customs) an “employment business”.  The particular employment business had been Site Services (Recruitment) Ltd (“Site Services”).  Site Services, in common with all the other employment businesses doing business with Helping Hand, had started its life as a one-man business; it had been incorporated following advice from Helping Hand.  

7.	Site Services made contact with the plumbing contractors for the Portsmouth project namely East Goscote Plumbers Ltd (“EGP”).  Site Services ascertained that EGP needed temporary workers in July 2007.  Site Services negotiated rates, numbers of workers and dates with EGP.  Fourteen temporary workers comprising plumbers, installers and mates were needed for the project.  

8.	Site Services sent a confirmation order to Helping Hand and to EGP; the confirmation order notified EGP that Site Services was acting for Helping Hand.  

9.	Helping Hand had credit insurance with cover of £250,000 for each policy client (such as EGP); Helping Hand carried out a credit check on EGP.

10.	Helping Hand and EGP entered into an agreement confirming the terms and conditions negotiated by Site Services.  The agreement contained an acknowledgment by EGP that EGP was responsible for the supervision and control of the temporary workers while working on site at the Portsmouth hospital.  

11.	The temporary workers were “sourced” by Site Services.  Fourteen workers were needed for the Portsmouth project.  We did not have exact details of how many were already known to Site Services and how many came through advertising in job centres.  We do know that Helping Hand is registered with the Department for Work and Pensions as an employment agency and it has a gangmasters’ licence issued by the Gangmasters Licensing Authority; as such Helping Hand is obliged to comply with the respective codes of practice.  The advertisements placed in the job centres state that “Helping Hand has vacancies for …”.  Helping Hand pays any advertising fees.  

12.	Engagements of all the temporary workers for the Portsmouth project was by Helping Hand.  

13.	Helping Hand sent each temporary worker an offer of “an assignment as a temporary worker to carry out the following work as per our standard Terms and Conditions”.  The terms and conditions were attached.  The letter stated the name of Helping Hand’s Client, i.e. EGP, the location and the start date; it requires the temporary worker to supply Helping Hand with P45s or completed P46s and it explains Helping Hand’s method of payment as being weekly in arrears.  

14.	When the start date for the Portsmouth project came, Site Services had its representative available to deal on a day-to-day basis with any problems arising from the provision of the temporary workers.  

15.	Time sheets (on paper headed with either the names Helping Hand and Site Services or just Helping Hand) were filled in by EGP and sent to Helping Hand at the end of the working week.  Helping Hand issued an invoice to EGP.  This stated payment was to be made to Bibby.  (The arrangements with Bibby are summarised in paragraphs 33 and 34 below).

16.	The invoice issued by Helping Hand shows 14 temporary workers; 12 were named followed by the term “c/o” followed by a code name; this we understand to stand for a managed service company.  That status, where accepted by HMRC, enables payment to be made without deduction of tax.  Two of the workers had no managed service company and were therefore paid under deduction of tax.  

17.	Site Services had a standing agreement with Helping Hand, the details of which will be summarised later.  Site Services had no agreement with EGP and no agreement with any of the temporary workers.  

18.	After payment of the temporary workers’ fees, Helping Hand accounted to Site Services for the gross profit margin on the supply to EGP minus a 5% service fee.  

19.	That concludes the scenario.  We turn now to examine the parties to the arrangements and their relationships.

Helping Hand

20.	Helping Hand’s Director’s Report records that it is 50% owned by Mr A David.  The other 50% of the equity is held by another director.  The “Principal Activity” of Helping Hand is stated as “that of the supply of contract labour”.  The audited accounts show as “turnover” the gross amounts paid by customers (e.g. EGP) to Helping Hand.  The “cost of sales” is the amounts paid to the temporary workers or their managed service companies and to the employment businesses.  

The employment businesses and their relationship with Helping Hand

21.	Site Services is one of the ten employment businesses that does business with Helping Hand by “sourcing” the work and the temporary workers required to do it.  Eight of those employment businesses work wholly in the construction field.  One of the others involved is a “secretarial agency”; the other operates in the farming (including fish farming) industry.  None of the employment businesses existed before becoming involved with Helping Hand.  Mr David is a director of four of the employment businesses.  Some were set up by ex-staff members of Helping Hand as sole traders and later incorporated.

22.	The agreements between Helping Hand and the employment businesses are headed with these words:

“Providing that Helping Hand when you need it most.
Finance, Payroll and Credit Control”

We refer to these agreements as “the Helping Hand/employment business Agreements”.  The agreement is stated to last for 24 months minimum.  The employment business, referred to as “The Agent” in the agreement, agrees to act “as agent” for Helping hand “in contracting to provide temporary workers … to the Client” (i.e. the end-user such as EGP).  The employment business undertakes not to render any invoice to the Client in relation to the provision of temporary workers.  The employment business agrees “to procure that” Helping Hand “shall have no liability to the client for any loss … arising from the failure of” the employment business “to provide a temporary worker … or for the negligence, dishonesty, misconduct or lack of skill of the temporary worker …”.  The possible liability of the employment business to Helping Hand is backed by a fixed and floating charge over all the employment business’s assets.  

23.	Helping Hand undertakes, in the words of the Helping Hand/employment business Agreement, to “arrange the payment of each temporary worker’s remuneration subject to deduction of appropriate NICs and Schedule (sic) and Income Tax (PAYE) applicable to the temporary worker as required by law”.  Helping Hand undertakes to pay to the employment business an amount equal to the gross payments from the Client introduced by the employment business less “service costs”, VAT, the full amounts paid to the temporary workers (tax included) and the cost of credit checks.  “Service costs” are the 5% fee taken by Helping Hand.

24.	Helping Hand holds a CIS5 card.  The employment business does not.  The privilege given by the CIS5 card is to enable the Client (e.g. EGP) to make gross payment to Helping Hand of the charges for the temporary workers.  Full responsibility for accounting for tax then falls on Helping Hand. The practical effect of the CIS5 card privilege is, we believe, as follows.  Helping Hand has to pay the temporary workers within a few days of the end of the working week; where the workers are managed service companies payment is made without deduction of tax.  Helping Hand receives payment via Bibby, by instalments and at a later time than the due date for payment of the temporary workers.  The right to receive payment gross from the client is therefore essential to the cashflow arrangements of Helping Hand.

25.	Any loss arising from a contract with a client falls on Helping Hand which carries insurance so far as this is possible.  

Helping Hand’s relationship with the temporary workers

26.	The only contract that the temporary worker has is with Helping Hand.  The contract is similar to that explained in the description of the Portsmouth project scenario where Site Services was the employment business.  Helping Hand pays the temporary worker by BACS on the Friday of the week following the week during which the work was done.   Helping Hand issues the temporary worker with a pay slip and, where appropriate, accounts for tax and NICs.

27.	Many of the temporary workers come from other parts of the EU and particularly from Poland.  Helping Hand is a registered recruitment agency and an approved gangmaster and it has the responsibility of ensuring that its temporary workers have the requisite Home Office licences and are duly registered with the Home Office Workers Registration Scheme.  For the Polish workers Helping Hand provides them with a Polish translation of their agreement with Helping hand.  Helping Hand encourages its workers to join the appropriate trade union, e.g Amicus.  

28.	Helping Hand issues temporary workers with a sheet of paper telling them how to complain.  Complaints are to be addressed direct to Helping Hand.  

Helping Hand’s relationship with the Client

29.	We were shown sample agreements between Helping Hand and the Client.  Helping Hand agrees, for example, to supply such personnel as may be required by the Client to ensure reasonable standards of skill, to be responsible for accounting for tax and NIC and to check the temporary worker’s right to work in the UK.  The agreement will typically set out a scale of hourly charges to be paid by the Client.  

30.	At intervals Helping Hand writes to Clients asking for feed-back on the performance of the contracts to provide to temporary workers.  

Helping Hand’s Promotional Literature

31.	Helping Hand advertises itself as providing a service of “Complete Back Office Solutions”.  The advertisements are directed at employment businesses (such as Site Services).  They describe its services as “complete back office support solutions to the recruitment industry” and they state as follows:

“Helping Hand lets you do what you know best … Recruitment and making money”.

32.	Mr David’s evidence was that those words were for advertising purposes only and did not present the full picture of Helping Hand’s obligations.  As will be seen from our conclusions, we accept Mr David’s evidence on this point.

The Factoring Agreement

33.	The Client pays Helping Hand via the factoring company (Bibby). Helping Hand’s factoring agreement with Bibby is that Helping Hand will assign trade debts owed to it (i.e. the invoice demands owed to Helping Hand by the Clients) to Bibby, and Bibby will then act as a debt collector.  The advantage for Helping Hand with this arrangement is that Bibby will advance funds to Helping Hand in respect of the amounts of the debts before those debts have actually been collected by Bibby.  Bibby will advance up to 85% of the assigned value to Helping Hand, and until such time as the debt is collected Bibby will charge Helping Hand interest on the advanced funds.  Bibby will also charge Helping Hand a fee which will cover the debt collection services to be carried out by Bibby, and this fee is 2½ % of the assigned debt value. 

34.	If the assigned debt is collected by Bibby, Bibby will pay Helping Hand the 15% balance of the assigned debt value, minus the 2½ % fee charged by Bibby.  If Bibby fails to collect the whole debt, Helping Hand bears the loss which will ordinarily be covered by its own credit insurance.  There were, the evidence showed, some serious bad debts that fell to be borne by Helping Hand.  

The case for the Commissioners

35.	Customs point to the heading of the Helping Hand/employment business Agreement (see paragraph 22 above) and to the promotional literature referred to in paragraph 31 above.  Those, say the Customs, show that Helping Hand’s supplies are limited to payroll and back office services to the employment businesses.  That had been the understanding of the visiting officer (see paragraph 2 above). While the wording of the contracts had been designed to show Helping Hand making the supplies to the Clients and as receiving the payments from the Clients as principal, those provisions were not determinative. The words of the Helping Hand/employment business Agreements and of the agreements between Helping Hand and the Client did not answer the question of what was the nature of the VAT supply in the case.  The question of whether Helping Hand made the supplies to the particular Client, or whether the supply was made to the employment business, depended, as Laws J (as he then was) observed in Customs and Excise Commissioners v Reed Personnel Services Ltd [1995] STC 588 at 595, on the application of the VAT rules (in section 1) to the particular facts.  The particular facts showed that, despite the absence of any agreements between the employment business and the Client, the actual supply of staff was by the employment business and not by Helping Hand.

The case for Helping Hand

36.	The Customs have, argued Mr Eamonn McNicholas for Helping Hand, misunderstood the arrangements.  The VAT position is governed by the contract between Helping Hand and the Client and those between Helping Hand and the temporary workers.  The reality of the arrangements is wholly in line with the terms of those contracts.

Conclusions

37.	We are satisfied that Helping Hand makes the supplies of temporary workers to the Clients.  The decision in the letter of 18 December 2006 was wrong and was based on a misunderstanding of the true position.  

38.	The true construction of the contractual documents produces the answer to the question – what was the nature of the supply in the case?  The employment businesses were parties to no agreements relevant to the supplies of temporary workers to the Clients.  The employment businesses had no contractual obligations to the Clients to provide the Clients with temporary workers.  They had no contracts with the temporary workers.  They receive no consideration from the Clients.  They assumed no contractual obligations save as agents for Helping Hand under the terms of the relevant Helping Hand/employment business Agreement.  Thus, so far as concerns the contractual arrangements for the provision of temporary workers to clients, the employment businesses made no supplies and receive no consideration.  

39.	Addressing the Reed Personnel Services (supra) approach, we ask whether the reality is different from the “parties’ private law obligations”.  We think not.  The reality is that the employment businesses are the “fixers” for Helping Hand which assumes the obligation to supply the temporary workers to the Clients.  Helping Hand’s functions go beyond the statements in the promotional literature that Customs have relied upon.  We agree in this respect with Mr David’s explanation.  We are satisfied that Helping Hand receives consideration for the supplies from the Clients who look to Helping Hand as the responsible supplier.  To enable Helping Hand to make the supplies it engages the temporary workers by contract and pays them.  The substance of Helping Hand’s position is underpinned by its recognition by the Department for Work and Pensions as a registered recruitment agency, its insurance covering employer’s liability for injury to workers, its approval as a gangmaster, its CIS certificate (and its payments to HMRC), the fact that it bears the risk of bad debts by clients and the manner in which it presents itself in its own audited accounts.

Decision

40.	For the reasons we have given we allow the appeal.  We award Helping Hand its costs of an amount to be agreed.  If not agreed the matter should be referred back to the chairman for a further direction.

SIR STEPHEN OLIVER QC
CHAIRMAN

RELEASED: 24 October 2007

LON 2007/0775