20930

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

LONDON TRIBUNAL CENTRE

	ORIEL SUPPORT LIMITED	Appellant

	- and -

THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

			Tribunal:	JOHN CLARK (Chairman)
					RAY BATTERSBY

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

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

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

© CROWN COPYRIGHT 2009
DECISION

1.	Oriel Support Ltd (referred to in this decision as “OSL”) appeals against two decisions taken by the Respondents (“HMRC”). One was contained in HMRC’s letter to OSL dated 8 December 2006. The other was contained in HMRC’s letter dated 7 December 2006 to another company, UK Labour Ltd. The decision in both letters was that OSL did not make supplies of staff to customers. The letter dated 8 December 2006 also indicated that the invoice presently supplied to employment agencies for payroll could not be treated as a supply for VAT purposes as no supply was made, therefore OSL could not charge VAT on this invoice.
The facts
2.	The text of the Statement of Agreed Facts is set out below, subject to minor editorial changes. In addition we were provided with a number of bundles of documents, including witness statements from Brian Pursey, Mrs Susan Copley and Anthony Borman on behalf of OSL and Christopher Wells and Miss Elinor Crockford on behalf of HMRC. Mr Pursey, Mrs Copley, Mr Wells and Ms Crockford also gave oral evidence. We set out additional findings of fact after the Statement, and where appropriate we consider disputed facts later in this decision.
Statement of Agreed Facts
(1)	OSL is a limited company, incorporated in England & Wales on 3 December 2004 under company number 5304654.
(2)	On 21 April 2005, OSL applied to HMRC to be registered for VAT, with effect from 1 May 2005. The VAT 1 was signed by Brian Pursey, a director. OSL was subsequently registered for VAT with effect from 1 May 2005.
(3)	On 12 January 2006, Miss Elinor Crockford of HMRC visited OSL to enquire into its VAT declarations. Miss Crockford was an officer of HMRC’s Labour Providers team, based at Swindon VAT office, dealing in particular with tax and VAT issues in the employment industry. At that visit OSL provided Miss Crockford with a copy of a document which was referred to by OSL as a ‘Complete Financial Outsourcing’ agreement (‘CFO’).
(4)	The CFO referred to an ‘Operating Manual’, a manual produced by OSL.
(5)	OSL invoiced end users of the services of the workers for the price of the labour provided to the end users and VAT was calculated and charged to the end users by reference to that price.
(6)	Further visits to OSL were made by Miss Crockford during 2006. HMRC formed the view that OSL and the employment agencies that had contracted with it were accounting for VAT incorrectly.
(7)	During November and December 2006, Christopher Wells, an officer of HMRC in the Labour Providers team based at Harlow VAT office, interviewed directors of three employment agencies – Technical Moves Ltd, Bespoke Recruitment Ltd and UK Labour Ltd – who used OSL’s services.
(8)	On 7 December 2006, Mr Wells sent a ruling letter to UK Labour Ltd, an employment agency which had contracted with OSL, in which he set out decisions made by HMRC as recorded in that letter.
(9)	On 8 December 2006, Miss Crockford sent a ruling letter to OSL in which she set out decisions made by HMRC in relation to OSL, as recorded in that letter.
(10)	On 20 December 2006, OSL appealed against Miss Crockford’s decisions, notified by her letter dated 8 December 2006, and Mr Wells’ decisions in relation to UK Labour Ltd, notified by his letter dated 7 December 2006.
3.	In the course of the hearing, OSL and HMRC adopted a set of agreed terms to describe the parties involved in the various contracts under review. These were:
(1)	The Customer, namely the end user of the services provided;
(2)	OSL;
(3)	The Agent, ie the employment agency or similar entity. [Note that we do not consider that the use of this term is in any way determinative of the capacity in which the Agent acts, so that this may be either as principal or agent, depending on the effects of the relevant contractual documentation];
(4)	The Worker, who could be an employee of the Agent, a self-employed individual, or an individual provided through a “personal service company”.
4.	A significant proportion of the evidence related to the manner in which HMRC had arrived at the respective decisions. In the course of the hearing, the parties agreed that it was not necessary to review this process, which had been examined in other proceedings, and that we should concentrate on the terms of the contractual relationships between the various persons involved, and the nature of the supplies made.
5.	There were no agreed sample documents. We were provided with examples of documentation. We set out below our description based on those examples. The evidence showed that there were two possible sets of circumstances in which OSL became involved. In some cases, the Agent was starting up its business, and entered into a contractual relationship with OSL as part of the process of commencing business. In others, the Agent had a pre-existing business, with the three parties to existing contracts being the Agent, the Worker and the Customer; in those cases, the relationship with OSL was added to those existing contractual relationships. Mr Pursey’s evidence was that currently, ie in 2008, there were 130 Agents with CFOs, and that probably about a quarter, say 30, had had a pre-existing client book.
6.	With some modifications based on the other evidence, we set out Mr Pursey’s description of the way in which the arrangements worked. (We comment below on the effects of the contractual arrangements, so at this point we merely reproduce his views as to those effects, without indicating whether we agree or disagree with those views.) The Agent, acting as a disclosed agent of OSL, identified new Customers. It them referred their details to OSL which in turn determined whether it was prepared to enter into a contract with each of those Customers. If a Customer was approved, the Agent would enter into a contract for the supply of labour as a disclosed agent of OSL, on the basis of the latter’s Standard Terms and Conditions, together with such of the Agent’s own standard terms and conditions as were not inconsistent with those of OSL. The CFO required that the Agent disclosed to the Customer the contractual relationship between the parties. This confirmation was required as part of the “Client Application Form” signed by the Customer.
7.	The Agent employed some individual Workers and engaged the services of others through service companies.
8.	The Worker worked at the premises of the Customer and filled in a time sheet. This was provided to the Customer, who signed it and returned it to OSL. OSL then raised an invoice against the Customer in OSL’s own name, but disclosed the logo of the Agent. These invoices had OSL’s Standard Terms and Conditions on their reverse side.
9.	The sums due under the supply agreement were due solely to OSL. The credit risk associated with the contract was covered by OSL’s credit risk insurance, as shown in the Credit Insurance Schedule to the CFO indicating the Agent’s name, and specifying the “prepayment level cover percentage”, and the “first loss excess on each debtor balance”.
10.	Under the sub-contract agreement between OSL and the Agent, the latter was entitled to a fee (“ the Contract Fee”) for its work equal to the amount invoiced to the Customer, such sum being payable on receipt of payment from the Customer and/or receipt of credit insurance proceeds, if relevant. The invoices from Agents to OSL were prepared by OSL on a “self-billing” basis, following a ruling by Miss Crockford on behalf of HMRC. As required by HMRC, they contained the following statement: “The VAT shown is your output tax due to Customs and Excise”.
11.	OSL agreed to pay the sums due from the Agent to the Workers or their service companies and to account for PAYE as appropriate. These payments were made irrespective of whether the payments due from the Customer had or had not been recovered. OSL raised “payroll invoices” against the Agent in respect of these payroll costs.
12.	The Agent was entitled to an advance payment equal to a specified percentage of its Contract Fee, subject to credit limits. The payment of the payroll costs by OSL was treated as the making of an advance payment to the Agent. Any other fees and charges incurred, in particular the Service Fee, calculated as a percentage of the amount invoiced to the Customer, were similarly treated as advances. A discount charge was also calculated and charged by reference to the amount of the advance payments to the Agent at any one time. All these other items were included in a “Fees and Charges” invoice.
13.	OSL also retained from this advance payment an amount equal to the VAT that the Agent would need to account for in respect of the transaction. This amount was made available to the Agent when its VAT payment fell due.
14.	OSL accounted for the PAYE to HMRC under OSL’s own PAYE reference. (The position relating to payments to sub-contractors is considered later in this decision.)
15.	Under OSL’s internal accounting system, a “Weekly Movement Schedule” was prepared for each Agent, reflecting all the above items and showing other details of the financial and accounting position as between the Agent and OSL. Such Schedules generally covered the provision of Workers to a number of Customers.
16.	As Mr Pursey confirmed, the relationship between OSL and the Agent was governed by the CFO. The main example provided in evidence of a CFO that had been entered into before HMRC’s decision on 8 December 2006 was one dated 12 July 2005 between OSL and a company called Encon Staffing Associates Ltd (“Encon”). (Other examples included in evidence were a CFO entered into on 12 July 2005, the date of OSL’s purchase of the business [see below] from the administrators of a predecessor company, with Ford Recruitment Ltd, and a CFO with New Resources Ltd dated 1 August 2006. The latter contains additional provisions, but the main clauses look similar to those in the Encon CFO.) The “Service” to be provided pursuant to the Encon CFO was defined as: “the complete financial outsourcing services to be provided by [OSL] to the [Agent], as described in the Operating Manual.” With substitutions for the terms defined above, the relevant parts of Clauses 2 and 3 provided:
“2.1 [Encon] agrees to use the Service on an exclusive basis. Whilst this Agreement is in force, every contract that it enters into for the supply of temporary or permanent workers shall be entered into by [Encon] as agent for [OSL], and [Encon] shall disclose to the [Customer] that it is contracting as agent on behalf of [OSL] as principal.
2.2 [Encon] shall ensure that all Contracts entered into are subject to [Encon’s] standard terms and conditions incorporating the Standard Terms. [Encon] shall not amend its standard terms and conditions incorporating the Standard Terms without the prior written consent of [OSL] . . .
. . .
2.4 [OSL] agrees to pay to [Encon] the Contract Fee in respect of each invoice following receipt by [OSL] of the corresponding invoiced Amount or credit insurance proceeds and any excess payment . . . in respect of such invoiced Amount.
2.5 [Encon] has no authority to vary the terms of Contracts, or, save as expressly provided in this Agreement, to act as agent for [OSL] or to incur any liabilities on behalf of or in the name of [OSL] and [Encon] shall not hold itself out or act as [OSL’s] agent save as aforesaid.
3.1 [Encon] agrees to perform, as sub-contractor to [OSL], the obligation under each Contract to find [Workers] to be supplied and/or introduced to the [Customer].
3.2 [Encon] shall enter into contracts, as principal, with [Workers].
3.3 Save for those obligations and liabilities which, under this Agreement, are the express responsibility of [OSL], [Encon] agrees to perform (as sub-contractor to [OSL] so far as entering into contracts with [Workers] are [sic] concerned, but otherwise as agent for [OSL]) all obligations and meet (at [Encon’s] expense) all liabilities under each Contract.
3.4 No separate fee is payable by [OSL] to [Encon] for [Encon’s] services in fulfilling Contracts. Payment for these services is included in the Contract Fee.”
17.	Clause 5 of this CFO  provided:
“Complete Financial Outsourcing
“5.1 [OSL] agrees to provide its complete financial outsourcing service, as specified in the Operating Manual, in respect of each Contract notified . . . Invoice(s) rendered to [Customers] will be in the name of and for the account of [OSL] and [Encon] authorises and licences [OSL] to (i) refer to [Encon] as disclosed agent for and on behalf of [OSL] and (ii) use [Encon’s] trading name and trademarks on such invoices for administrative and operational purposes only.
5.2 The fees payable by [Encon] to [OSL] for the performance of the Service, which shall be payable at the times specified in the Operating Manual, are:
	5.2.1 (in respect of Services in respect of the supply of Temporary 	[Workers] only) a fee equal to the total cost (without any mark-up 	and giving credit for any amounts which are reclaimed) of the payroll 	service specified in the Operating Manual plus VAT where 	applicable;
	5.2.2 the Service Fee;
	5.2.3 all ancillary charges, costs, expenses and disbursements of the 	Service incurred by [OSL] from time to time plus VAT where 	applicable, including but not limited to those specified in the 	Operating Manual.”
18.	The Operating Manual (the main example of which was dated October 2005, although later examples were included in the evidence) contained detailed information relating to the service provided pursuant to the CFO, including descriptions of the practical operation of that service. A schedule to the Operating Manual contained OSL’s “Standard Terms”. (The reference in those terms to another company described as “Oriel”, Oriel Support Services Ltd, appears to be an error, as the latter company had gone into administration on 12 July 2005, a contributory cause having been an error in the calculation of finance advances by its finance provider, and the subsequent tightening of Oriel Support Services Ltd’s financial position to recoup the excess lending. By 25 August 2005, according to a statement produced by the administrators, there was an outstanding VAT debt of approximately £662,000, and a debt of around £1,031,000 to HMRC in respect of PAYE and National Insurance. OSL had purchased the business of Oriel Support Services Ltd on 12 July 2005.)
19.	The Standard Terms were expressed to be supplemental to the Agent’s standard terms and conditions of trading. The October 2005 version included the following terms:
“2 [Workers]
[OSL] contracts as principal with the [Customer] and any reference in the [Agent’s] standard terms and conditions to the [Agent] . . . shall be construed as a reference to [OSL]. [OSL] will use reasonable endeavours to procure that the [Agent] (as its sub-contractor for the purposes of this clause 2) shall introduce to the [Customer] suitable [Workers] to carry out work for the [Customer]. The [Customer] accepts that no warranty as to the suitability of any [Worker] is or shall be given by [OSL]. [OSL] cannot guarantee to find a suitable [Worker] for a vacancy.
3 Payments
	3.1 All payments due from the [Customer] shall be due and payable 	not later than . . .
	3.2 The [Agent] has no authority to accept, on behalf of [OSL], any 	payment due from the [Customer]. Payment by the [Customer] of any 	amount to the [Agent] shall not discharge the [Customer’s] obligation 	to pay such amount to [OSL].”
20.	Mr Pursey acknowledged that labour used on a contract could either be employed by an Agent, or be self-employed, or be an individual engaged through a personal services company. In Encon’s “Terms of Engagement for Temporary Workers”, Clause 2.2 provided that:
“For the avoidance of doubt, these Terms shall not give rise to a contract of employment between the Employment Business [ie Encon] and the Temporary Worker. The Temporary Worker is engaged as a self-employed worker, although the Employment Business is required to make statutory deductions from the remuneration in accordance with clause 4.1.”
21.	Neither these Terms, nor Encon’s “Terms of Business for the Supply of Temporary Personnel” entered into between Encon and Customers, made any reference to OSL’s Standard Terms and Conditions, or to OSL’s involvement; however, Encon’s obligations under the CFO included the commitment to ensure that all contracts entered into with Customers were subject to Encon’s Standard Terms incorporating OSL’s Standard Terms. In addition, under the terms set out in the Operating Manual relating to “Client Contracts” (ie contracts with Customers), “[OSL’s] standard terms and conditions must be issued in conjunction with [Encon’s] standard terms.” A further term stated: “The [Worker] shall remain the responsibility of [Encon] with [Encon] overseeing the relationship between the [Worker] and the [Customer] on behalf of [OSL].”
22.	 OSL did not have a gangmaster’s licence; Mr Pursey explained that where one was required, it was for the Agent to obtain it. OSL did have certain information relating to Workers; if a Worker was an employee, OSL would be aware of that Worker’s PAYE/NIC details. OSL also took responsibility to ensure that, where appropriate, immigrants’ papers were filed at the Home Office. He indicated that Workers were not parties to CFOs, although OSL considered that under these, it had obligations to pay the Workers. He confirmed that OSL did not tell workers where to go, or when to turn up; the Customer would tell them what to do once they arrived on site.
23.	If work by a Worker was found to be unsatisfactory, in the majority of cases the Customer would be responsible and would have to pay. Sometimes OSL would discuss the position with the Agent and grant a credit invoice, such as a case where a secretary had produced poor typing. The Agent might give credit. Mr Pursey considered that under the Terms and Conditions, the quality was down to the Customer. It was not clear whether that view had been tested, as clause 3.6 of the CFO requires the Agent to indemnify OSL against all claims in respect of Workers. He also considered that it was the Customer who was responsible for advice on contracts of employment. There was no evidence to indicate the basis for this view. Mr Pursey gave a single example of a claim by a Customer being met by OSL; this was for vandalism by a Worker to a vending machine on the Customer’s premises. However, he indicated that OSL would normally have charged the Agent, but because that Agent had ceased trading before the claim had been dealt with, OSL had been unable to recover from that Agent.
24.	OSL had entered into a Debt Factoring Agreement with Bibby Invoice Discounting Ltd. The copy of the Agreement provided in evidence was not signed, and was not accompanied by the “Standard Conditions for the Purchase of Debts (Edition A/2004)” referred to in the Agreement. We accept Mr Pursey’s evidence that a copy of this Agreement signed by OSL was sent to Bibby, and find that the copy before us is an accurate record of the Agreement. In the section headed “Client Particulars”, the nature of OSL’s business is described as “Payroll”. Under Clause 2 of the Agreement, OSL agrees to sell and Bibby agrees to purchase “all the debts referred to in clause 4 of the Particulars”. These details do not appear anywhere in the “Client particulars”, nor anywhere else in the document before us. We find, from Mr Pursey’s evidence, that the debts concerned were the payments due from the Customers.
25.	Invoices against Customers carried the logo (or in some cases merely the address) of the relevant Agent, and OSL’s logo. They stated: “Please make payment 30 days after Invoice date. Cheques made payable to: [OSL] and sent to [address: BACS details].” They contained the following statement: [Agent’s name] is acting as agent for [OSL] [OSL’s registered office, registration number]”. The account to which payments were made was a trust account over which Bibby had control; it owned the legal title.
26.	OSL had entered into a Credit Insurance policy, shown as first established on 1 August 2007; there was no evidence of what policy was in force from 12 July 2005, when OSL had purchased the business, up to 31 July 2007. The “Policy Schedule” in the evidence before us was endorsed: “This is not your (currently) legally valid policy.” Mr Pursey indicated that the credit insurance policy itself was set out in approximately 150 pages of documents, and that the advice had been not to include them in the evidence. The Policy Schedule referred to OSL’s “Trade activities” as “Provision of recruitment and payroll services”. The Credit Insurance Schedule to each Agent’s CFO set out the applicable limits, as already indicated above, in particular specifying the extent of the Agent’s liability to the insurance excess. The Agent would complete a “Client Credit Application Form” for each Customer, requesting a particular credit limit. OSL would then determine what credit limit was acceptable; it did not always allow a limit as high as that requested in the application. (A number of the examples of these forms provided in evidence were dated later than the decisions issued by HMRC in December 2006.)
27.	A sample invoice to a Customer dated 6 January 2008 (again, much later than the date of HMRC’s decisions) contained the following wording: “The provision of staff by Ad Lib Holdings for week ending 06/01/2008”. The Standard Terms endorsed on the reverse referred to “the supplier of staff named overleaf”. Unlike other examples provided in evidence, this invoice did not refer to Ad Lib acting in an agency capacity on behalf of OSL. Another invoice from a company named Pavillion [sic] Associates Ltd addressed to OSL referred to “Payroll Services”; Mr Pursey commented in evidence that some people were “loose with descriptions”. Three earlier examples of invoices to Customers, dated 7 December 2007, referred to “The provision of staff by A2B Drivers”.
28.	An example was given of the provision of a Worker, Nick Higgins, by a personal service company, Parasol Ltd; it invoiced the Agent, New Resources Ltd, and the invoice from the latter to the Customer referred to the provision of staff by New Resources Ltd. There was no reference to this being on OSL’s behalf.
29.	Various examples were given of “Credit Control Correspondence”, in which queries were raised by Customers in letters or e-mails to OSL. In two cases the correspondence was in the second half of 2007, and in the remainder the correspondence was at various stages during 2008. There was no correspondence in evidence dated before HMRC’s decisions in December 2006. The correspondence did not mention any party other than OSL.
Arguments for OSL
30.	Mr Mc Nicholas submitted that it was OSL which made the supply of temporary workers to Customers; OSL used services supplied to it by its various Agents within the trade. The opinions of HMRC officers did not displace the economic facts of the reality of the situation. The leading case on this was Helping Hand Asset Management Ltd v Revenue and Customs Commissioners (2007) VAT Decision 20408. OSL submitted that its position was on all fours with that decision, although here the Workers, whilst paid through OSL, were either employed by Agents, self-employed or provided their services through their own company.
31.	OSL was in the business of supplying temporary workers or labour to the Customer. The process of finding the staff was carried out through OSL’s network of Agents. OSL received the labour of the staff found by the Agents and supplied by them to OSL. OSL then used those supplies to make the supply to the Customer. The Agents did not themselves make a supply of any kind to the Customers, nor were they in an economic position to do so, whether through lack of business resources or not being of sufficient stature to deal with the Customers. Similarly for sound economic reasons (one-stop approach, legal certainty and ease of use) the Customers dealt only with OSL. The business rationale was that the Customer dealt only with OSL, one point of contact for whatever types of staff and was assured that all employment taxes were paid and accounted for. For an Agent the benefit was a steady supply of jobs with OSL on which to place and use the temporary staff which the Agent found.
32.	The HMRC ruling erroneously misconstrued all the Workers as coming through an agency. This was not correct; the self-employed or similar direct contact workers invoiced OSL directly, including VAT, and were duly paid by OSL, which then used those services in making an onward supply to the Customer. The Customers did not differentiate between, and did not need to concern themselves with, staff supplied to them by OSL, from whatever source OSL obtained them. Broadly, of every £100 the Customer paid OSL, OSL made a profit margin of about £5 after payment of taxes and deduction of costs. Thus for VAT purposes there were two distinct supplies: Agent to OSL and then OSL to Customer.
33.	Mr Mc Nicholas argued that there was not a tripartite position in the present case. HMRC might seek to rewrite events by alleging this, relying on Customs and Excise Commissioners v Reed Personnel Services [1995] STC 588. This case did not seek to rewrite matters but was sound authority for ascertaining a VAT supply from the facts and evidence of the whole case. In OSL’s case, the facts and the economic reality were that OSL made the supply. Mr Mc Nicholas cited Eastbourne Town Radio Cars Association v Customs and Excise Commissioners [2001] STC 606, Auto Lease Holland v Bundesamt für Finanzen C-185/01 [2005] STC 598, Revenue and Customs Commissioners v Thorn Baker Ltd [2007] EWCA Civ 626 ([2007] All ER (D) 319 (Jun)), and Stichting Regionaal Opleidingen Centrum Noord-Kennemerland/West-Friesland (Horizon College) v Staatssecretaris van Financiën C-434/05 [2008] STC 2145.
34.	OSL submitted that based on the evidence it made the VAT supply to the Customer. HMRC’s case was based on the unsubstantiated assertion that the Agent made the main supply. It was clear from Reed that it was necessary to look at the substance of the overall facts of the case and then look at them in the context of the taxing statute.
35.	Mr Mc Nicholas observed that it was curious that HMRC should be taking the approach which it was in OSL’s case; it was better for temporary workers to be treated properly and openly on the books with tax paid, rather than having problems with such workers not being registered or declared, with the tax lost.
36.	In OSL’s Further and Better Particulars, it had put forward an alternative contention based on section 47(3) of the Value Added Tax Act 1994 (“VATA 1994”). OSL’s purpose in doing so was to highlight the economic unreality of HMRC’s position on the Agents, which Mr Mc Nicholas argued was contrary to authority.
37.	OSL submitted that its appeal should be allowed, with costs.
Arguments for HMRC
38.	Mr Mantle argued that typically, only three persons were concerned in the provision of labour, namely the Agent, the Customer, and the Worker. In this appeal it was necessary to consider a fourth person, OSL. He contended that before OSL (or its predecessor) contracted with an Agent, typically, if not invariably, the Agent had previously entered into and acted on agreements with both Customers and Workers.
39.	He emphasised that there was not at any time any agreement entered into between OSL and any Worker.
40.	Under the CFO Agreements, OSL provided Agents with a “complete financial outsourcing service”. Mr Mantle argued that this description fitted in with the chief services which OSL provided to Agents.
41.	OSL’s case was that the Agents did contract with the Customers, but “upon the terms of OSL’s Standard Terms and Conditions, together with such of [the Agent’s] own Standard Terms and Conditions as are not inconsistent”. It was an important part of OSL’s case that it categorised the Agent as an “agent” of OSL.
42.	Mr Mantle listed a series of functions which were carried out by the Agents of their own accord, not on the instructions of OSL. OSL itself provided the “CFO” services to Agents, including administering and effecting the payment of Workers’ wages and invoicing Customers for the provision of labour. He referred to the invoicing arrangements and the money flows.
43.	The main issue was whether the supplies of labour made to Customers were made by OSL or by the Agents. A possible second issue was whether the VAT shown on the Payroll Invoices was chargeable. HMRC had clearly ruled that such VAT was not chargeable.
44.	HMRC contended that it was the Agents who made the supplies of labour to Customers. The contract terms in very large part, on their true construction, supported or were wholly consistent with HMRC’s VAT analysis that the Agents supplied labour to Customers. This required a proper approach to construction, not simply accepting that labels used by the drafter of OSL’s documents were an accurate reflection of the roles and obligations of the parties. OSL’s supplies were as described in the judicial review proceedings R (oao Oriel Support Ltd) v Revenue and Customs Commissioners [2008] EWHC 1304 (Admin), [2008] All ER (D) 209 (Jun), at [3]. On OSL’s alternative contention that the supply of labour to Customers should have been treated as a supply by OSL by virtue of section 47(3) VATA 1994, HMRC contended that the criteria for the application of that provision did not exist.
45.	On the second issue, HMRC’s contention was that OSL did not supply the “payroll” to Agents. There was no supply of that nature. OSL re-charged to the Agents the expense of the payments made by OSL to the Agents’ workers on the Agents’ behalf. The payroll was not itself supplied, nor did the amount of the payroll represent the value of any supply for VAT purposes. Mr Mantle acknowledged that OSL did supply to the Agents the service of administering the payroll, including effecting payments to Workers, but he commented that those were part of the CFO service for which the Service Fee was the consideration. The value of that supply of services did not include the amount of the payroll.
46.	Mr Mantle criticised the statement by OSL in its Further and Better Particulars that the dispute on the main issue “simply concerns which company is responsible for VAT accounting”. He submitted that the dispute was more fundamental. It was about the identity of the person who made a supply. That identification determined who was liable to pay VAT to HMRC. The identity of the supplier was not a matter within HMRC’s discretion, but was dictated by VATA 1994 and underpinned by EC law. He emphasised the importance of establishing the right answer to the question of the identity of the true supplier. While it was a relevant fact that the OSL standard terms provided for payment to be made to OSL rather than to the Agent, that could not dictate who made the supply.
47.	He referred to Reed, in particular to passages at p 591 and p 595. The latter had been approved by the House of Lords in Eastbourne Town Radio Cars Association at [14]. At [15] and [16], Lord Slynn had emphasised the importance of the “commercial reality” of the contract under consideration. Mr Mantle also referred to Tesco plc v Customs and Excise Commissioners [2003] STC 1561 at [159] and to paragraph 27 of the Opinion of the Advocate General in Customs and Excise Commissioners v Mirror Group plc [2001] STC 1453. Mr Mantle summarised what he considered to be the correct approach to the main issue; we consider this below.
Discussion and conclusions
48.	As already indicated, we have put to one side questions relating to the process by which HMRC arrived at their decisions; these were ventilated in the judicial review proceedings earlier in 2008. We see no need to make any comment on that process, as our consideration is limited to the evidence concerning the relationships between the various parties concerned, and the identity of the persons making the respective supplies.
49.	Mr Mc Nicholas argued that HMRC’s reliance on the judgment in the judicial review proceedings was misconceived; the judicial review was a separate matter, before a separate court, addressing a separate issue and without the benefit (for either side) of a cross-examination of witnesses and probing of evidence. We expressed our view on this at the hearing; we accept that in judicial review proceedings the ability to test the evidence is more restricted. We consider that the proper approach is to review matters on the evidence before us, without in any way relying on the judgment in those other proceedings. However, once we have reached our provisional conclusions, we think it permissible to review them against the views expressed in the judicial review judgment, to see whether there is consistency as between the respective views. To take this approach recognises that in the judicial review proceedings, there was an opportunity to consider the terms of the contractual documentation, despite the absence of any cross-examination of witnesses.
50.	We agree with Mr Mantle that the main issue is whether the supplies of labour made to Customers were chargeable to VAT. In OSL’s Further and Better Particulars, it had stated: “The dispute between OSL and HMRC concerns simply which company is responsible for VAT accounting.” We accept Mr Mantle’s argument that the dispute is more fundamental, being about the identity of the taxable person making a supply.
51.	Mr Mc Nicholas relied on the decision in Helping Hand Asset Management Ltd. He argued that OSL’s position was on all fours with that of the Appellant in that case. However, he accepted that in OSL’s case, the Workers, whilst paid through OSL, were either employed by the Agents, self-employed, or provided their services through their own company. We consider these differences to be of major significance. In Helping Hand at paragraph 26, the Tribunal found: “The only contract that the temporary worker has is with Helping Hand.” At paragraph 38, the Tribunal said:
“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.”
52.	Thus in Helping Hand there was a direct relationship between Helping Hand and the Client (ie the party described in OSL’s case as the Customer) and the employment business (ie the “Agent”) had no contractual relationship with the temporary workers and no contractual obligations to provide the Clients with temporary workers. We consider that the positions of OSL and the Agents in the present case are radically different, as explained below.
53.	Mr Mc Nicholas contended that there was not a tripartite position in OSL’s case, but relied on Reed Personnel Services for the approach to establishing which party made the VAT supply. We do not agree with his conclusion on the number of parties; it is necessary to consider the Customer, OSL, the Agent, and the Worker (on whatever basis the latter’s services are provided). In Helping Hand, there were three parties, namely Helping Hand itself, the temporary worker, and the Client. In Reed, the parties were Reed, the temporary nurses and the relevant hospital.
54.	Mr Mantle referred to Reed as the leading case on the correct approach to ascertaining what supplies were made by whom to whom in scenarios involving three or more parties. We do not necessarily see the comments made in that case as inapplicable where there are only two parties, although in such a (probably simpler) situation the analysis may well be an easier matter. In Reed at 591 f-g Laws J made clear that the initial process where an issue turned wholly on the construction of a document having legal consequences was that of construing that document, but that the contractual position might not be identical with the concept of making a supply for VAT purposes, so that construction of the document might not always answer the question of the nature of the VAT supply. Where it did not, there remained a question of fact.
55.	We take into account the further comments made by Laws J in Reed at 595 a-d, endorsed by the House of Lords in Eastbourne Town Radio Cars Association, but do not think it necessary to set them out in this decision.
56.	Mr Mantle set out what he argued to be the correct approach to the main issue, much being based on the above comments in Reed:
(1)	Its resolution depended on the application of VATA 1994 to the facts;
(2)	The terms of contracts entered into by parties concerned in the relevant transaction could not be assumed to determine the right tax result, in cases where three or more parties were concerned;
(3)	Who supplied what to whom was to be ascertained from the whole facts of the case;
(4)	It was necessary to look at the whole circumstances, including the contractual documents, to arrive at a decision;
(5)	Within the whole circumstances, what actions were actually performed by which person must obviously be ascertained and regard must be had to what was actually done by each person;
(6)	The relevant documents included not only contractual terms between OSL and a Customer and the Agent and a Customer, but also the other contract terms between parties concerned, ie OSL, Agents and Workers (Tesco at [159], requiring consideration of the economic purpose of the scheme);
(7)	Relevant contract terms must be construed to examine the private law obligations of the parties, in so far as such an obligation was relevant. In that process of construction it was the effect of the agreement which was important, not labels applied by written terms;
(8)	However, in analysing the relevant transactions it was necessary to go behind the strictly contractual position and to consider objectively what was the economic purpose of each relevant transaction in the scheme of relevant transactions (Tesco at [159]);
(9)	It was necessary to bear in mind the commercial reality of the situation (Eastbourne at [15]-[16]).
57.	We accept Mr Mantle’s approach as correct in the light of the relevant authorities.
58.	Both parties accepted that it was necessary to take into account the whole facts of the case. As an initial step, we review what the respective parties do; we go on to consider the contractual position, then review the economic purpose of the arrangements, and then consider the question of commercial reality.
What the parties do
59.	In considering what the respective parties do, we describe matters in the present tense, although we acknowledge that the decisions taken by HMRC were based on the results of their enquiries before December 2006. There was no evidence that any change in the method of operation had taken place after HMRC’s decisions had been issued, although there were some changes in the terms of the documentation. The findings set out below are based in part on the results of Mr Wells’ enquiries made of three Agents in November and December 2006.
60.	The Agents carry out the following tasks in relation to Customers, on the Agents’ own initiative and not on OSL’s instructions. Each Agent looks for Customers wishing to be provided with the labour of Workers. The Agent makes contact with those Customers. The Agent agrees with the Customer how many Workers, and what type of Workers, are to be provided. The Agent agrees with the Customer the rates to be charged for Workers, and the hours for which the latter are to work. If necessary, the Agent visits the Customer. The Agent directs Workers to provide their labour to the Customer. The Agent liaises with the Customer in respect of the Worker’s performance. The Agent may receive queries about invoicing, if these are not addressed to OSL. If the Customer is dissatisfied with the Agent’s services, complaints are made to the Agent rather than to OSL. The Agents retain the right to cancel contracts with Customers, and do not confer this on OSL (although OSL may set a credit limit in relation to the Customer, and if this is exceeded, the Agent has to decide whether to continue the contract at its own risk).
61.	In relation to Workers, the Agents carry out the following further tasks, again on their own initiative and not on OSL’s instructions. They identify potential Workers, interview them or otherwise assess them for suitability, and ensure that they have reasonable standards of skills, reliability and integrity. They recruit Workers suitable to be provided to Customers. The Agents enter into an agreement with each Worker. The Agents (and only the Agents) owe an enforceable obligation to the Workers to pay them remuneration. The Agents employ the Worker, or obtain the latter’s agreement to provide services for the Agent (eg to go on assignment to a particular Customer). Where the Worker works for either a personal service company or a “composite company” providing the Worker’s services, the Agents deal with the company rather than directly with the Worker.
62.	Although Mr Mc Nicholas argued that personal service companies invoiced OSL direct, the one example provided in evidence showed the personal service company, Parasol, invoicing the Agent, New Resources Ltd. There was no example in the evidence of any self-employed person having invoiced OSL direct. Under Encon’s contractual documentation, the “temporary workers” are described as self-employed workers under contracts for services, but subject to the tax deduction scheme under section 134 of the Income and Corporation Taxes Act 1988 and Class 1 National Insurance Contributions. There is no evidence of any of these workers invoicing OSL for their services. The only examples provided in evidence of what was described in an index page as “Examples of subcontract labour contracted direct to OSL” were nine VAT invoices, all dated 2008, rendered by five different companies against OSL in respect of the services of one or more individuals. These specified either an hourly or a daily rate, and showed the total due, together with VAT on that total. They are normal VAT invoices, and do not resemble the self-billed invoices raised by OSL on behalf of Agents. We deal separately below with the questions arising from these “subcontract” invoices.
63.	In Mr Mc Nicholas’ Supplementary Skeleton Argument, he indicated that over half by value of the labour purchased by OSL for onward supply to its Customers came from Workers who provide labour via a personal service company or as self-employed sole traders (in the latter case, through an intermediary company). We did not see any supporting evidence to establish this, although Mr Pursey did attempt to arrive at a percentage estimate of the balance between self-billing and what he described as “contractor pay”. He thought that it was about two thirds agency self-billing but about half by value. There appeared to us to be a conflict between different parts of Mr Pursey’s evidence. In his second witness statement, he said that labour on a contract could be either employed by an Agent, or be self-employed contractors, or be workers engaged through a service company, and then subsequently supplied to OSL by the Agent; whichever basis applied, the individual Worker was required to complete a timesheet which was submitted to the Agent. In his oral evidence, he made the distinction between the self-billing arrangements involving Agents and “contractor pay”, and appeared to imply that the latter arose in different circumstances from those involving Agents. It is not clear to us on the evidence to what extent any labour may have been supplied in the absence of an Agent, and we regard as unsubstantiated the contention set out in Mr Mc Nicholas’ Supplementary Skeleton Argument.
64.	OSL’s involvement is to carry out the CFO services. These are administering and effecting the payment of remuneration to Workers (or their personal service companies) and invoicing Customers for the provision of labour. The CFO services benefit the Agents by ensuring that Agents receive the amounts invoiced to Customers following the issue of those invoices but before the Customers pay. In some circumstances the amounts are paid to the Agents, while in others the amounts are used to discharge liabilities of the Agent to OSL. OSL deals with invoicing, credit for Agents, and matters relating to payment by Customers. OSL also deals with queries from Customers, such as audit queries or questions as to the appropriate levels of charges for the provision of labour. In relation to Workers, OSL deals with payroll queries. Subject to the question of effectiveness of the relevant contractual terms, considered below, the actions to be carried out by the Agents are to be regarded as effected by them in the capacity of agents for, or in respect of certain functions, sub-contractors of, OSL.
65.	Customers use the labour provided for their business, and pay for the provision of that labour. As confirmed in evidence, Customers exercise a degree of supervision over Workers provided to them; in certain cases of poor performance, a revision of the fee is negotiated with the Agent.
66.	Workers are directed by the Agents to carry out assignments with Customers. These assignments involve attending work at an establishment specified by the Customer until termination of the assignment by the Customer or the Agent. Under Encon’s terms of engagement for temporary workers, the Worker agrees to co-operate with the Customer’s reasonable instructions and accept the direction, supervision and control of any responsible person in the Customer’s organisation. Although we have not been able to examine the terms of similar documentation issued by other Agents, we think it reasonable to assume that such documentation contains similar terms, whatever the contractual basis on which Workers are engaged.
The contractual position
67.	As Mr Pursey indicated, Workers may be employees, self-employed or provided through personal service companies. The contracts for the provision of Workers’ services are entered into between each Agency and the Worker. This position is not disturbed by clause 3.2 of the CFO Terms and Conditions entered into between the Agency and OSL, which confirms that the Agency is contracting as principal when entering into contracts with Workers. There is no contract between OSL and any Worker. The consequences are that the Worker does not owe OSL any obligation to OSL to carry out work for any Customer, and that OSL has no rights to direct any Worker, so cannot compel a Worker to go to work for a particular Customer or to carry out particular tasks. This position is not affected by clause 3.3 of the CFO Terms and Conditions, which describes the Agent as a sub-contractor to OSL as far as Workers are concerned. Further, in those cases where an Agent has entered into contracts with particular Workers before becoming bound by a CFO, it would not be possible to superimpose on those contracts any relationship between OSL and those particular Workers without obtaining their express agreement.
68.	The position as between the Customer, the Agent and OSL is more complex. Taking Encon as the example, the relationship between Encon and the Customer is governed by Encon’s “Terms of Business for the Supply of Temporary Personnel”. Clause 2.1 of these Terms specifies that they “constitute the contract between [Encon] and the [Customer] for the supply of the Temporary Worker’s services by [Encon] to the [Customer]”. In clause 5.1, headed “Remuneration”, “[Encon] assumes responsibility for the payment of the Temporary Worker’s remuneration and, where appropriate, for the payment of National Insurance Contributions and PAYE Income Tax applicable to the Temporary Worker”. Clause 7.1 acknowledges Encon’s efforts to give satisfaction to the Customer by ensuring reasonable standards of skills, integrity and reliability from Workers, then limits Encon’s liability except in certain cases arising from its own negligence.
69.	We were unable to hear evidence from Mr Casson, a director of Encon, as HMRC objected to his witness statement, so requiring him to attend, but he was unable to do so. We indicated at the hearing that, as there was no opportunity to hear him under cross-examination, we could not ascribe any weight to his witness statement. In any event, his statement did not indicate whether Encon’s Terms of Business for the Supply of Temporary Personnel and its Terms of Engagement for Temporary Workers had remained the same before and after Encon entered into the CFO with OSL, nor whether any Workers under contract before that stage had continued under contract after that point. As only one version of each of these documents was provided, we assume, on the balance of probabilities, that there was no change, and that at least some Workers were under contract both before and after 12 July 2005. There is no evidence to indicate whether Encon had previously been in a similar relationship with Oriel Support Services Ltd, OSL’s predecessor from which OSL had purchased the business.
70.	OSL’s Standard Terms, exhibited as Schedule 2 to the Operating Manual, state that they supplement and amend the Agent’s standard terms and conditions; in the event of any conflict, OSL’s Standard Terms are to prevail. There is no specific provision to indicate that OSL’s Standard Terms disapply or substitute any terms for the Agent’s standard terms, or to remove the Agent as a party to the contracts which it enters into with Customers or with Workers. OSL’s Standard Terms acknowledge that the provision of labour to the Customer will be by the Agent, but throughout these Terms the Agent’s performance is expressed to be “on behalf of” OSL. Clause 2 of the earlier version of those Terms (as to the different versions, see below) provides that “[OSL] contracts as principal with the [Customer]”. It continues: “[OSL] will use reasonable endeavours to procure that the [Agent] (as its sub-contractor for the purposes of this clause 2) shall introduce to the [Customer] suitable [Workers] to carry out work for the [Customer].” (The later version makes broadly similar provision.)
71.	Under Clause 3.1 of OSL’s Standard Terms, payments are to be made to OSL within a specified period. (In the version attached to the Encon CFO, there is a blank space where the period should be specified; the later version specifies the date stipulated on the face of the invoice.) Under Clause 3.2, the Agent is expressed to have no authority to accept, on OSL’s behalf, any payment due from the Customer. There is no provision within OSL’s Standard Terms describing the basis of calculation of any charges, or imposing any obligation on the Customer to pay such charges.
72.	Attempting to construe the two parties’ (ie Encon’s and OSL’s) sets of terms together raises difficult issues of construction. We have found the process more complex as a result of variations in the form of OSL’s Standard Terms. Mr Mantle referred to certain provisions which did not appear in the version of those Terms included as Schedule 2 to the October 2005 version of OSL’s Operating Manual. An example of the latter amended version is that exhibited to the CFO dated 26 February 2007 between Office Jobs Ltd, trading as Liberty Resourcing, and OSL; a similar version of OSL’s Standard Terms appears on the reverse of the invoice dated 4 May 2007 relating to the provision of Nick Higgins through New Resources Ltd. The 2005 version of these Terms contained four clauses, while the later version contained five. There are no examples in the evidence of invoices rendered to Customers under the logos of Encon and OSL showing what version of the terms appeared in 2005, or what version is to appear on the reverse of more recent invoices.
73.	As the definition of “Standard Terms” in the CFO is such terms as are “specified in the Operating Manual from time to time”, we have assumed that there are periodical reissues of the Operating Manual and therefore that Agents are bound to use the revised version of OSL’s Standard Terms once they have received a reissue of the Operating Manual. We therefore disregard the version of OSL’s Standard Terms contained in Schedule 2 to the 2005 version of the Operating Manual, and consider the more recent version on the assumption that the latter has not subsequently been altered in any material respects.
74.	We agree with Mr Mantle that the Agent’s standard terms are intended to create, and do create, enforceable obligations as between the Agent and the Customer. This is confirmed by clause 1.3 of the later version of OSL’s Standard Terms, which states: “The engagement of a Worker or the commencement by a Worker of work for, or the provision of Services to, the [Customer] (whichever first occurs) will be deemed to be acceptance of and agreement to the [Agent’s] standard terms and conditions as supplemented by these Standard Terms. [OSL] contracts as principal with the [Customer] and any reference in the [Agent’s] Standard Terms and conditions to the [Agent] . . . shall be construed as a reference to [OSL].” This mechanism does not exclude the Agent as a party to the agreement with the Customer.
75.	The effect of the Agent’s standard terms, such as those of Encon, is that the Agent has a direct obligation to the Customer to provide the labour of Workers in accordance with the Customer’s requirements. The Agent is able to carry out that obligation as a result of the contracts which it has entered into with Workers (whether employees or self-employed) or with personal service companies making Workers’ services available. The obligation undertaken by OSL under clause 2 of the later version of its Standard Terms is the following: “[OSL] warrants that it shall use reasonable endeavours to procure that the [Agent] (as its sub-contractor for the purposes of this clause 2) shall introduce to the [Customer] suitable Workers to carry out work for the [Customer] and that it shall exercise reasonable skill and care in the performance, through the [Agent], of the Services.” We agree with Mr Mantle that OSL is not itself in a position to provide labour to the Customer and that the latter has contracted for and is entitled to the benefit of the performance of that obligation by the Agent.
76.	The CFO Standard Terms and the Operating Manual set out (at clause 5, see paragraph 17 above) OSL’s obligations to provide the “Complete Financial Outsourcing Service” to the Agent. They also deal with the contractual relationships between OSL, the Agent and Customers (see clause 3.3, set out at paragraph 16 above. The latter provision indicates that it is the Agent which provides the labour to the Customer. (We consider below the references to the Agent as sub-contractor or agent for OSL.) Clause 3.4 states that the Agent is not paid a separate fee by OSL for the service of providing Workers to Customers; payment is regarded as included in the “Contract Fee”, as set out in the “CFO Schedule”. The latter Fee is a percentage (usually 100 per cent) of the “Net Invoiced Amount”, ie the total amount payable by a Customer under an invoice, but excluding the VAT charged on that invoice. Thus there is no specific price attributed to the provision of this service to OSL by the Agent.
77.	As indicated above, OSL does not enter into contracts with Workers, whether direct or through the Agents; under clause 3 of the CFO Terms and Conditions, the Agent does so as principal but is described as doing so as a sub-contractor of OSL. In the same way, the Agent is described as carrying out various other functions as agent of OSL. We have already indicated that we have difficulty in accepting that such functions can be superimposed on pre-existing relationships between an Agent and Workers and that Agent and Customers entered into before the Agent became bound by the CFO. We have similar difficulty in accepting, as a matter of commercial reality, that the functions which the Agent is described as carrying out in the capacity of agent or sub-contractor are genuinely being carried out on behalf of OSL. In relation to agency, Halsbury’s Laws, Agency (Volume 1 (2008) 5th edition) states:
“The relation of agency arises whenever one person, called the 'agent', has authority to act on behalf of another, called the 'principal', and consents so to act. Whether that relation exists in any situation depends not on the precise terminology employed by the parties to describe their relationship, but on the true nature of the agreement or the exact circumstances of the relationship between the alleged principal and agent. If an agreement in substance contemplates the alleged agent acting on his own behalf, and not on behalf of a principal, then, although he may be described in the agreement as an agent, the relation of agency will not have arisen. Conversely the relation of agency may arise despite a provision in the agreement that it shall not.”
78.	We set out below in more detail our views on commercial reality. We do not consider these “labels” adopted in the contractual documentation to accord with the true nature of the relationship between the Agents on the one side and OSL on the other. In terms of the contractual relationships involved, we consider that the contract between the Agent, such as Encon, and the Worker is simply a bipartite relationship and that there is nothing for OSL to contribute to that relationship; we regard it as significant that no separate fee is payable to the Agent for the work which it is said to carry out on behalf of OSL. In the same way, OSL is not contributing to the other relevant relationship, that between the Agent and the Customer. OSL does undertake to carry out certain obligations for the Customer, the main example being the warranty contained in clause 2 of OSL’s Standard Terms as set out above. Such obligations are not among those central to the contract between the Agent and the Customer for the provision of labour.
79.	Our conclusion on the contractual terms is that the Agent contracts as principal to supply labour to the Customer, that the Agent, again acting as principal, enters into the contracts with the Workers, and that OSL provides the services under the CFO for the benefit of the Agent (and, to a limited extent, for the Customer). As already indicated, we consider that there are major differences between the relationships in OSL’s case and those in Helping Hand Asset Management Ltd. In that case, as indicated at paragraph 38 of the decision (see above), the employment businesses were not parties to any agreements relating to the supplies of temporary workers to the clients. In the present case, the Agents are parties to such agreements. In Helping Hand, the employment businesses had no contractual obligations to the clients to provide the clients with temporary workers; here, the Agents do have such obligations to the Customers.
80.	In Helping Hand, the employment businesses had no contracts with the temporary workers. Here, the Agents do so, and as a result are bound by legislation such as that relating to gangmasters; this is unlike the position of Helping Hand, which was registered with the Department of Work and Pensions as an employment agency and had a gangmasters’ licence issued by the Gangmasters Licensing Authority (paragraph 11 of that decision). In that case, the employment businesses received no consideration from the clients. Here, payment is made against an invoice rendered by OSL and showing both its logo and that of the Agent; we consider this question of invoicing and payment below. Finally, the employment businesses assumed no contractual obligations save as agents for Helping Hand under the terms of the relevant Helping Hand/employment business agreement. In the present case, the Agents have obligations under contracts with Customers, to which OSL’s Standard Terms are applied (to the extent that they are effective). Taking into account all these highly material differences, we do not think that the decision in Helping Hand can be regarded as a guide to our decision on OSL’s appeal.
81.	In relation to the system for invoicing and payment, we do not consider that consideration is moving between the Customer and OSL, despite the requirement in OSL’s Standard Terms for payments to be made “without deduction, set-off or counterclaim to [OSL’s] account specified in the relevant invoice”. As the services of the Workers have been provided to the Customer by the Agent, the payment is in consideration for the Agent’s provision of those services. We do not consider that this position is affected in any way by the Agent’s acceptance (pursuant to the CFO) that the monies are to be paid to OSL’s account and the Agent’s corresponding agreement that OSL’s Standard Terms, in particular those relating to payment, are to be brought into the contractual relationship as between the Agent and the Customer. We think it relevant that the parties consider it necessary for invoices to carry not only OSL’s logo but also that of the Agent; this appears to us to recognise that the consideration is moving to the Agent, but that the latter has agreed that the Customer’s obligation is to be discharged by making payment to OSL’s specified account. In addition, the invoices generally refer, as indicated above, to “the provision of staff by [the Agent]”. We think that this recognises the reality of the contractual relationship between the Agent and the Customer.
82.	The “subcontract invoices” raise difficult questions, mainly because there is no other evidence concerning the wider contractual arrangements to which they relate. As the invoices are not prepared on a self-billing basis, we conclude that the various companies rendering these invoices are unlikely to be “Agents”. It is possible, therefore, that the basis on which the individual Workers’ services are provided is different from that set out above. However, without additional information to explain the basis for the provision of the Workers’ services and the arrangements between OSL and any Agent or Customer (or with both, possibly in a manner similar to the other arrangements already considered), there is insufficient evidence for us to decide that there is any difference between the transactions to which these “subcontract invoices” relate and the transactions which we have already analysed.
83.	We now compare our conclusions on the contractual arrangements with those in the judicial review judgment, R (oao Oriel Support Ltd) v Revenue and Customs Commissioners. The difficulty of reconciling the status of the Agent as an agent of OSL is reflected in the judgment of Kenneth Parker QC at [5], where he says:
“[5]. Under clause 2.1 of the CFO the LPC enters into the contract with the end user as agent of OSL, that is, it is OSL that is treated by the CFO as providing the labour supply services to end users. However, under clause 3.2 of the CFO the LPC enters into the contract with workers as principal on its own behalf, and not as agent of OSL. Bearing in mind the well-known case of Nokes v Doncaster Amalgamated Collieries, Limited [1940] AC 1014, it was unclear to me how OSL could carry out the contract with end users by making available workers who were contracted exclusively to the LPC, unless those workers expressly or impliedly agreed that OSL was entitled to dispose of their services for that purpose. There was no express agreement produced, or any evidence shown upon which such an agreement could be implied.”
On the basis of our conclusions as to the agent “label”, this difficulty disappears.
84.	We consider that our view of OSL’s functions under the arrangements accords with the description in the judgment (at [3]) of the chief services provided by OSL. In the same way, our views concerning the relationship between OSL and the Agent are consistent with the comments at [46]-[47] (made in the context of section 687 of the Income Tax (Earnings and Pensions Act 2003). (We consider below the comments made at [47] concerning commercial reality.)
85.	Whether we are correct or incorrect in our conclusions as to as to the effect of the contractual arrangements, contractual provisions do not themselves necessarily determine who made the relevant VAT supplies and what was the subject matter of those supplies. As indicated in Reed, it is necessary to look at the whole facts of the case, including what we have identified as what the respective parties actually do. In addition, we have to consider the economic purpose of the contractual arrangements and to take into account commercial reality.
Economic purpose
86.	In the light of the comments in Tesco at [159], that “it is necessary to go behind the strictly contractual position and to consider what is the economic purpose of the scheme”, we review the economic purpose both of the scheme as a whole and the transactions in that scheme. Mr Mc Nicholas described the business rationale as being that the Customer deals with OSL, one point of contact for whatever types of staff, and is assured that all employment taxes are paid and accounted for; for an Agent, the benefit of the scheme is a steady supply of jobs with OSL on which to place and use the temporary staff which the Agent finds.
87.	Mr Pursey explained the “one stop approach”; this was one supplier providing a range of services under one banner within a bundled product. This product consisted of economic support, payroll and credit control. He described the arrangements as “oiling the wheels” for the benefit of the Agent. For a Customer, the advantage was that of dealing with OSL and not with a number of Agents; there were cases where Customers dealt with OSL and took labour from a number of different Agents.
88.	In the light of the evidence (and taking into account commercial reality, considered below), we do not find these descriptions convincing. We consider Mr Mantle’s analysis of the economic purpose, with which we agree and which we set out in this and the following paragraph, to be much more in accordance with the facts as we have found them and with our views as to the effects of the contractual arrangements. At transaction level, the economic purpose of the contract with the Customer is to provide the services of suitable workers to meet the Customer’s requirements for labour. The party in a position to fulfil that purpose is the Agent. It seeks Workers, and under its contracts with them it can require them to carry out work for Customers. OSL is not in a position to do this, and the agency “label” has no effect on OSL’s position.
89.	The economic purpose of the contract between the Agent and OSL, namely the CFO, is a combination of purposes. One is the provision of payroll and invoicing services. This “outsources” for the Agent the task of dealing with such matters. The second function is that of improving the Agent’s cash flow, by payment (or set-off against other amounts due) in advance of the time of actual payment by the Customer.
Commercial reality
90.	We accept Mr Mantle’s argument that the latter identification of the economic purposes of the contracts involved in the scheme fits with commercial reality. As a matter of such reality, what is the effect of introducing OSL into the relationship between an Agent and a Customer (whether or not the Agent has a pre-existing business before entering into the CFO with OSL)? Is the nature of that relationship changed? The Customer needs a reliable source of labour of appropriate quality for the work to be carried out to its commercial satisfaction. The Customer approaches the Agent (or in some cases is approached by the Agent) to organise the provision of that labour. The Customer relies on the Agent, which has entered into contracts with Workers (or with their personal service companies, or with companies providing the services of self-employed Workers) so that it is in a position to provide the services of Workers to the Customer.
91.	Having OSL in the picture is not a pre-requisite to the supply which the Agent makes to the Customer. Expressly, OSL is not in a position to provide the labour of Workers to the Customer. As a matter of commercial reality, confirmed by the responses which Mr Wells obtained to his questionnaires when visiting two of the Agents which had entered into CFOs with OSL, the Agents do not see the labour as being provided by OSL. (We accept that these responses are an informal record, and do not have the status of signed statements; despite this, we do consider that they provide a reliable impression of the Agents’ views.)
92.	The dealings between the Customers and the Agents, so far as described in these responses by Agents, do not suggest in any way that the Customers consider the labour to be provided by OSL; all categories of queries, other than invoicing queries, are described as being dealt with as between the Customer and the Agent. This is entirely consistent with the reality being that the Customer requires performance of the main functions relating to the provision of labour to be carried out by the Agent, these being functions that the Agent (and only the Agent) is in a position to perform. Although OSL warrants, at clause 2 of its Standard Terms, that it will use reasonable efforts to procure that the Agent (described as doing so in the capacity of OSL’s sub-contractor) will introduce suitable Workers to the Customer, we agree with Mr Mantle that this does not change the commercial realities; OSL’s function is as the provider of its “Complete Financial Outsourcing” service.
93.	We also agree with Mr Mantle that, in broad terms, Agents carry on operating their own labour provision businesses, having outsourced their payroll and invoicing functions to OSL and entered into arrangements with OSL regarding payments, credit insurance, credit and recourse in a way designed to provide the Agent with an improved cash flow. As already indicated, the invoices reflect the commercial reality, in showing the Agent’s logo and describing the subject matter as “the provision of staff by [the Agent]”.
94.	As before, we compare our conclusions with those in the judicial review judgment at [47] (in which the Agent is referred to as “the LPC”):
“[47]. Furthermore, the payments are at the expense of the LPC. Under the invoicing arrangements between OSL and the LPC (see CFO at 5.2.1 for the “payroll invoice”), OSL re-charges to the LPC the expense of the payments made by OSL to the employees of the LPC, so that in the final analysis the LPC bears the cost of the payments to its employees. The invoicing reflects the underlying commercial reality of the arrangements between OSL and the LPC. Although the end user makes payment to OSL, it is the LPC who performs the work on the ground for the benefit of end users and who in fact makes available workers for that purpose. OSL provides the payroll services set out at paragraph 3 above, and could not reasonably be expected to be rewarded for anything other than the provision of those services. LPCs would expect OSL to retain from the amounts received from end users only such amount as would reward OSL for the services that it provides to the LPC, the balance being returned to the LPC in order that the LPC would be able to pay its workers, meet its other expenses and earn a profit. Under the terms of the CFO, the balance payable to LPCs is reduced by the payments made to the employees of the LPC. The balance payable to the LPC is, therefore, less than would otherwise be the case if OSL did not make payments to the employees of the LPC. In commercial and economic reality the LPC has borne the cost of the payments made by OSL to the employees of the LPC.”
We think that our conclusions are entirely in accordance with those reached by Kenneth Parker QC in those proceedings.
Conclusions on the main issue
95.	HMRC indicated, for example in Mr Wells’ letter to UK Labour Ltd dated 7 December 2006, that they were working on the basis that the overall amount of VAT paid to HMRC and UK Labour together (under the arrangements in being before that decision letter was issued) had been the same as it would have been if the VAT had been declared “correctly”, ie according to HMRC’s analysis. Apart from a small number of examples mentioned in Mr Wells’ evidence of Agents failing to account correctly for VAT in accordance with the self-billed invoices, it appears to us that the position relating to other Agents is likely to be the same as for UK Labour Ltd. In other correspondence, HMRC referred to the dispute as being not what was the right amount of tax, but where the liability to it should fall.
96.	The result of HMRC’s decision is to put the Agents back into the normal position for employment agencies acting as principal (described in Customs and Excise Manual V1-5 Chapter 3 at 3.23(a);
“(a) The bureau acts as principal.
Here the bureau makes one supply of staff, which is normally standard-rated. The wages, income tax and National Insurance contributions of the staff are part of the cost which the bureau must bear (and pass on) in making its supply, and output tax is due on the full charge made to the client. Where the client asks the bureau to act on its behalf in paying the travelling and subsistence expenses of candidates attending interview, the bureau may treat these payments as disbursements for VAT purposes. But where expenses are paid to interview candidates from within the bureau's agreed commission, these may not be treated as disbursements.”
The amounts payable to OSL for the CFO services qualify for input tax deduction.
97.	For OSL, it was argued that having OSL as the supplier of the Workers’ services was better, in terms of collecting tax than putting the responsibility for accounting for the VAT on the relevant supplies of those services onto a much larger number of businesses, namely all the Agents who had entered into CFOs with OSL. We are not necessarily convinced that this is the case. Putting the responsibility for accounting for that VAT on a single entity entails the risk that that entity may suffer financial difficulties; the history of OSL’s predecessor, Oriel Support Services Ltd illustrates the potential difficulty. Further, OSL’s argument presupposes that the Agents may not comply in full with their obligations in respect of VAT; it is clear, from the nature of HMRC’s enquiries carried out in the present case, that Agents are encouraged to ensure that they do so comply. In any event, the analysis of supplies for VAT purposes cannot depend on, or even be influenced by, questions of proper compliance. The compliance regime has to be fitted into the framework of the supplies which the parties have actually made.
98.	Our conclusion on the main issue is that the supply of labour was made by the Agents to the Customers; there was no supply of labour by the Agents to OSL, nor any such supply by OSL to the Customers. Thus the decisions on these questions contained in HMRC’s letters dated 7 December 2006 to UK Labour Ltd and 8 December 2006 to OSL were correct.
Section 47(3) VATA 1994
99.	This provides:
“(3) Where services are supplied through an agent who acts in his own name the Commissioners may, if they think fit, treat the supply both as a supply to the agent and as a supply by the agent.”
100.	We agree with Mr Mantle that the Agents supplied the services of the Workers to the Customers and that OSL did not supply the services of the Workers either as principal or as agent. Thus the relevant services were not “supplied through an agent” within the terms of section 47(3) VATA 1994, nor were they supplied in OSL’s own name. The conditions for treatment of such services in accordance with section 47(3) are therefore not fulfilled.
Reference to the Construction Industry Scheme
101.	OSL referred to this Scheme, known as the “CIS”, and argued that decisions relating to this, including a decision of the Special Commissioners (Oriel Support Ltd v Revenue and Customs Commissioners, SpC 615, [2007] STC (SCD) 670), determined matters for the purposes of the VAT dispute. We do not consider that decisions made for the purpose of an entirely separate and distinct tax, which may not necessarily have been based on evidence identical to that before us, can be treated as extending to the materially different questions of identifying the nature of supplies for VAT purposes and establishing which parties make such supplies. As other VAT Tribunal decisions are not binding on another VAT Tribunal, it follows that we are not bound by a decision of the Special Commissioners. Further, that decision related to costs; it simply recorded a decision made by HMRC in respect of the application of the CIS to OSL, which had been on the day before an appeal hearing. We do not regard the decision as having been made by the Special Commissioner; as Mr Mantle argued, that was not a final judicial decision on the merits. Arguments concerning “res judicata estoppel” are therefore inapplicable.
The second issue
102.	The second issue is whether the VAT shown on the payroll invoices was chargeable. Both parties’ submissions on this issue were brief. HMRC contended that OSL did not supply the “payroll” to Agents, and that the position was as described in the judicial review proceedings at [47] (set out above); there was no supply by OSL to an Agent of money used to meet the Agent’s payroll liabilities recharged to the Agent and that the Agent was required to repay (by way of set-off or deduction from amounts that OSL was liable to pay to the Agent). The amount of the payroll was not supplied, nor was it the value of any supply for VAT purposes. There were numerous examples of situations in which a supplier of services paid a sum of money to the recipient of a supply, but that sum did not represent the value of the service supplied; the consideration was the amount which the supplier could take for itself. Here the remuneration which OSL could keep for itself was the Service Fee, plus any ancillary charges for particular additional services.
103.	Mr Mc Nicholas regarded HMRC’s position on this issue as unclear; it appeared to result from confusing the judicial review matter with the present appeal. The issue arose as a corollary of HMRC’s primary determination, that of refusal to recognise that OSL made a supply to the Customer, and meant that HMRC similarly refused to recognise that OSL made other related taxable supplies. The correct approach, as shown in Helping Hand, was for the Tribunal to apply the law to the facts which it found in order to decide whether it was OSL or an Agent which made the supply to the Customer; from this, everything else fell into place.
104.	We agree that matters are decided by our conclusion on the main issue that it is the Agent which makes the supply to the Customer. However, to the extent necessary, we accept Mr Mantle’s submissions on this second issue; OSL does not supply the payroll to Agents, and therefore VAT is not chargeable on the payroll invoices.
Summary of conclusions
105.	On the main issue, we find that the Agents supplied the services of the Workers to the Customers, that there was no supply of labour by the Agents to OSL and no supply of labour by OSL to the Customers. We confirm that the decisions made by HMRC and set out in the letters of 7 and 8 December 2006 were correct. In relation to section 47(3) VATA 1994, the conditions for its application were not met. For this appeal to have been successful, OSL would need to have demonstrated that they, and only they, were the employers or direct providers of labour. On the second issue, this is determined by our decision on the first issue, but to the extent necessary we accept HMRC’s submissions that VAT is not chargeable on the payroll invoices. In the light of these conclusions, we dismiss OSL’s appeal.

JOHN CLARK

CHAIRMAN
RELEASE DATE: 20 January 2009

LON/2007/0001