UK Upper Tax Tribunal hands down two decisions on VAT and tripartite agreements

In December 2015 the UK First Tier Tribunal handed down its decision in  Adecco Uk Ltd v Revenue & Customs [2015] UKFTT 600 – a case that illustrated the difficulties with tripartite agreements both in Australia and in the UK. The Tribunal had to decide whether Adecco was liable to pay VAT on the full charge paid by its clients for the services of non-employed temps provided by Adecco to those clients or only on the element of the charge retained by it (i.e. the commission or gross profit element). At issue was whether Adecco supplied the temps to its clients or only the service of introducing the temps.

My post discussing the decision of the First Tier Tribunal can be accessed here. That decision was also discussed in a paper I presented on tripartite arrangements in February 2016 – my paper can be accessed here.

On Friday 17 March 2017 the Upper Tax Tribunal handed down its decision on the appeal of the decision in Adecco and another decision relating to VAT and tripartite arrangements. In each decision the Tribunal (constituted by the same members) dismissed the taxpayer’s appeal and relied heavily on the decision of the UK Supreme Court in Airtours Holiday Transport Ltd v HMRC [2016] UKSC 21 and the principles outlined in that case (my post on the Airtours decision can be accessed here)

Adecco Uk Ltd & ors v HMRC [2017] UKUT 113.

In dismissing the appeal, the Tribunal observed that its task was made easier by the judgment of Lord Neuberger in Airtours which contained an analysis of the principles to be derived from previous decisions.  The decision of the Supreme Court was handed down after the decision of the First Tier Tribunal, so the primary judge did not have the assistance of that case.

The Tribunal (at [43]) stated that it was clear from Airtours that determining the nature of a supply, and who is making and receiving it, is a two-stage process. The Tribunal observed as follows:

The starting point is to consider the contractual position and then consider whether the contractual analysis reflects the economic reality of the transaction. If, as a matter of contact, a party undertakes to provide services  to another person in return for consideration from the other or a third party then there is, subject to the question of economic reality, a supply to the other person for VAT purposes. If the person who provides the consideration is not entitled under the contractual documentation to receive any services from the supplier then, unless the documentation does not reflect the economic reality, there is no supply to the payer. The contractual position normally reflects the economic reality of the transactions but will not do so where, in particular, the contractual terms constitute a purely artificial arrangement.

In applying these principles, the Upper Tribunal made the following findings:

  • there were contracts between the non-employed temps and Adecco and between Adecco and its clients – there was no contract between a non-employed temp and the client. The temps agreed to perform each assignment in return for payment by Adecco at an agreed hourly rate. There was nothing artificial about the agreements
  • the Upper Tribunal did not accept the argument that the fact that Adecco did not receive and use or consume the services provided by the temps leads to the conclusion that Adecco cannot make a supply of the temps to the clients
  • the economic and commercial reality of the transactions was that Adecco agreed to provide temps, who would carry out work, to the clients – what Adecco was supplying was the provision of a temp to perform an assignment

In a final observation, the Upper Tribunal stated that it hoped that the decision provided some clarification on the VAT obligations of employment bureaux but doubted that it provided guidance – except at a very high level – that will enable the VAT liability of other employment businesses to be determined without a thorough analysis of the contracts and an assessment of the economic reality of particular transactions. That liability will depend on the construction of the contractual provisions and the interpretation of the facts – matters which are always open to debate – and as Lord Reed said in paragraph 26 of WHA [WHA Limited v Her Majesty’s Revenue and Customs [2013] UKSC 24]:

…the decisions about the application of the VAT system are highly dependant upon the factual situations involved. A small modification of the facts can render the legal solution in one case inapplicable to another.

U-Drive Limited v Revenue & Customs [2017] UKUT 112

In U-Drive Limited v Revenue & Customs [2017] UKUT 112 the Upper Tribunal dismissed the taxpayer’s appeal of the decision of the First Tier Tribunal in U-Drive Ltd v Revenue & Customs [2015] UKFTT 667. The taxpayer (a car hire company) arranged for the repair of third party vehicles damaged in collisions with hired cars as an alternative to a claim being made through the third party’s insurance in which case the claim would ultimately be paid by the taxpayer’s self-insurance arrangement. There was no contract between the third party car owner and the repairer and the repairer invoiced the taxpayer for the repairs, which it paid. The taxpayer claimed that it was entitled to recover the VAT on those invoices.

The issue was whether the supplies made by the car repairers were made to the taxpayer or to the third party owners.

The Tribunal reviewed the previous decisions and expressed the same view as in the Adecco appeal, that it was clear from Airtours that determining who is receiving a supply is a two-stage process. The Tribunal (at [38]) outlined similar principles to those outlined in Adecco (at [43]) and extracted above.

Applying these principles to the facts, the Upper Tribunal made the following findings:

  • it was found by the First Tier Tribunal that there was a contract between the taxpayer and each repairer which the repairer agreed to repair the third party owner’s vehicle and, in return, the taxpayer agreed to pay the repairer for the repair. There was no contract (and often no contact) between the third party owner and the repairer and no contract between the taxpayer and the car owner.
    • viewed in isolation, the contracts between the taxpayer and the repairers show that there was a legal relationship between the repairers and the taxpayer pursuant to which there was a reciprocal performance and thus that the repairers supplied services to the taxpayer
  • it was common ground that the contracts were not artificial, but that did not mean that the economic reality of the transactions should not be considered – the Tribunal made the following findings on the economic reality of the transactions:
    • the taxpayer agreed to pay for the repair of the third party owner in order to discharge the liability of the taxpayer’s insurer to indemnify the hirer for the liability to compensate the third party owner for damage to the vehicle
    • the taxpayer did not have any liability to pay for the repair until after the damage had occurred and the third party owner had agreed to use the alternate procedure rather than make an insurance claim
    • the taxpayer agreed to pay for the repairs because it calculated that, by doing so, it would ultimately pay less than if the third party owner made a claim through his or her insurer
    • taking account of all the circumstances, in economic reality, the taxpayer simply agreed to pay for the repair of the third party owner’s vehicle – the taxpayer had no interest in the repairs other than as a means to meet (at reduced cost), a liability that would be incurred through its own insurer (and ultimately the taxpayer through the fact that the premiums were set by references to the claims made – which was in effect, self-insurance).


The decisions illustrate that when characterising the supply (or supplies) made under a tripartite agreement, or indeed any agreement, the first step is generally to analyse the contractual arrangements between the parties. That will often give you the answer – as it did in Adecco. However, that will not always be the case. In some cases a consideration of the economic reality may give you a different answer – as it did in U-Drive.

This approach is consistent with the following comments of Edmonds J (sitting on the Full Federal Court) in ATS Pacific Pty Ltd v Commissioner of Taxation [2014] FCAFC 33 at [29]:

The terms and conditions are the instrumentality through which the supply is made, but the text of these terms and conditions is not conclusive of the character of the supply that is made; that will depend as much on the manner of performance of those terms and conditions as the text of the terms and conditions themselves; it will also depend on the commercial or business purposes, discerned objectively, of those who have entered into the relevant contract.

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