Joint employment relationships: Lessons from VAT case law

Typically joint employment contracts can be relevant where a council establishes for commercial purposes two companies, one which satisfies the Regulation 12/Teckal tests and is inward looking; and the other which trades with third parties. Both companies may have employees jointly engaged by them.

A recent case has confirmed the principles to be considered when deciding if VAT is due on the reimbursement of employment expenses from one joint employer to the other joint employer, especially if both employers are not themselves a local authority, but companies owned by the Council in its expanding role as a public entrepreneur.

The case

Under the terms of a service level agreement (SLA) Agilisys Contact Services Limited (“Agilisys”) recharged InHealth (London) Limited (“In-Health”) remuneration it paid to individuals jointly employed. Agilisys and InHealth treated these recharges as disbursements that were VAT exempt.

HMRC contended that the charges for the joint employees should have been treated as part of the consideration Agilisys received from InHealth for a supply of services and should, therefore, be liable for VAT.

Summary of the facts

Following a successful tender, InHealth entered into a contract with the Department of Health valued at approximately £100m. Part of the contract required a Patient Referral Centre (“PRC”) to be set up. The PRC was a key element of the contract and also involved the set-up of a call centre that:

“was focused on the effective interaction with patients from their first point of contact, through the booking and patient safety aspects of their tests, to the submission of a diagnostic test result to a referring GP. This activity needed to happen in a manner that allowed us to evidence the quality of these interactions and also the compliance for each patient with a series of time standards in the Department of Health contract.”

As InHealth did not have the expertise to operate this, they tendered for a partner who had the technical capability and was willing to work in a close collaborative relationship with them. Agilisys were the successful bidder, and an SLA was entered into between the parties. The parties stated that the SLA used was an “off the shelf template” containing “standard…terms not all of which were reflective of the relationship which emerged.”

Although the SLA did refer to the joint employees, there was also a term contained within it stating:

• that the relationship between the parties was as independent contractors;
• there was no partnership or joint venture between the parties; and
• neither was acting as agent for the other.

The joint employment relationship arose as, whilst InHealth would have preferred to be the sole employer of the staff, they did not have experience of running a call centre. Joint employment was therefore considered to be the next best thing.

In practice, InHealth were directly involved with Agilisys in the overall control of the recruitment, training, managing and supervision of the joint employees. Evidence was submitted that this would not have been the case if the PRC was regarded as being effectively a service operated for InHealth by a third party, as opposed to a joint venture as it,

“could never have been economic or appropriate for us to dedicate so much senior time and management to the interaction with the PRC.”

InHealth employees (such as the Operations Director and Account Manager) had a heavy presence at the PRC. Although the Operations Director did not instruct the joint employees directly, he spoke to their managers if he was unhappy with their performance. The Operations Director predicted that if InHealth had not been involved to the same extent, the PRC contract would have been cancelled within 6 months.

The issue

The key issue in this case was whether the payments by InHealth to Agilisys of the recharged costs (relating to the jointly employed advisors) was part of the consideration Agilisys received for the services it supplied to InHealth under the service level agreement, as HMRC contended, or, as InHealth maintained, were properly treated by InHealth as disbursements.

The decision

The First Tier Tribunal tax chamber considered the terms and effect of the SLA entered into and went on to consider the wider circumstances to determine whether what happened in practice reflected what was written in the SLA.

The Tribunal was satisfied that the joint employees were genuinely jointly employed, that they worked for both InHealth and Agilisys and that the PRC was not provided to InHealth in accordance with the terms of the SLA. Instead there was a collaborative relationship between the parties in the provision and operation of the PRC and the service level agreement did not reflect the economic and commercial reality of the situation.

Therefore there was no supply of services from Agilisys to InHealth and it was accepted that the joint employees costs were disbursements and not subject to VAT.

Comments

This case serves as a useful reminder that joint employment arrangements can allow the sharing of staff without liability for VAT. This can be an important issue in structuring partnership or joint venture working arrangements. The case highlights the need to ensure that there is a genuine joint employment arrangement if the VAT advantages of this approach are to be realised.

The case also serves as a helpful reminder that it is best to ensure that the contractual documents reflect the reality of the relationship between the parties and what happens in practice.

Each case will turn on its own facts but properly drafted contractual documents and a joint employment strategy setting out how the arrangements will work in practice will help to set the expectations from the outset.

For more information, please contact Matthew Gregson.

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