Appeal Number: TC/2009/16010

[2011] UKFTT 286 (TC)

TC01148

Appeal number: TC/2009/16010

Value added tax – Supply of staff or services – Supply of temporary dental staff –whether exempt under Group 7, Schedule 9 VATA – Claim for repayment of output tax under s.80(1) VATA- Appeal dismissed

FIRST-TIER TRIBUNAL

TAX

SALLY MOHER T/A PREMIER DENTAL AGENCYAppellant

- and -

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMSRespondents

TRIBUNAL: DR K KHAN (Judge)

JOHN AGBOOLA,FCCA, MBA

Sitting in public inLondon on 10 and 11 March 2011

For the Appellant: Rebecca Haynes, Counsel

For the Respondents: Jessica Simor, Counsel,instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2011

1

DECISION

Introduction

1.This is an appeal under section 83(1) (t) of the Value Added Tax Act 1994 (“VATA”). It seeks to challenge the Respondents’ decision of 20 October 2009 to uphold their decision of 22 July 2009 to refuse payment of the Appellant’s claim made under section 80 VATA for VAT repayment in the sum of £609,119.31 in respect of the period 1 January 1985 to 31 December 1996. The Appellant made the claim for overpaid VAT following the decision ofFleming v HMRC [2008] All ER (D) 151 (Jan, HL).

Relevant facts

2.The Appellant, a dental nurse, established an employment business in 1976trading as Premier Dental Agency. In 1999 the business wassold as a going concern to Premier Employment Agency Ltd (“PEAL”) who carried on the same business until its sale to Staff Recruit Ltd in 2008.

3.The business made two types of supply : first, of temporary dental staff to dentists, which is the disputed supply, and secondly, of private permanent staff to dentists for an introduction fee. The core business was the provision of temporary dental staff comprising 97% of the business. There was also a small supply of dental technicians which was a nominal part of the business.

4.The business was registered for VAT under registration number 396 5727 95 with effect from 3 September 1994 and was deregistered with effect from 2 July 2000.

5.It should be stated that the Respondents dispute some of the facts, asserted by the Appellant, relating to the disputed supplies. In particular, they dispute the employment status of the nurses supplied.

6.The Appellant’s business worked on the following basis. They sourced nurses and employed them under a contract for services, accounted to HMRC for their PAYE, National Insurance, and Employers’ National Insurance. The Appellant had not retained any copies of the terms and conditions of engagement applicable either to their staff or to clients during the relevant period.

7.The Appellant treated the nurses as employees and the dentist or dental establishment to which the nurses were despatched were invoiced on the basis of a standard hourly rate. In circumstances where the Appellant supplied a dentist with a nursing auxiliary rather than a nurse, the auxiliary worked alongside and under the supervision of the registered health professional.

8.The Appellant stated that when the business was transferred to PEAL in 1999 it was run in the same way after its transfer as it had been run prior to its transfer.

9.In 2001, the Appellant became aware that a local competitor was not charging VAT on the supply of temporary nurses to dentists. On 21 May 2001, Mr A Moher, a shareholder in the company, its finance director and partner of Mrs Moher, contacted the National Advice Service (VAT) and was advised to write for a ruling on the tax treatment of its supplies. This was done on 2 September 2001.

10.A letter on 21 September 2001 from the Respondents confirmed that if PEAL was acting as principal on the supply of dental nurses, the supplies were exempt pursuant to Item 1, Group 7, Schedule 9 VATA. At all times thereafter PEAL accounted for VAT on its supplies of temporary dental nurses on the basis that those supplies were exempt. The Respondents accepted this position. The supplies of permanent dental nurses were standard rated. The business was therefore a partially exempt business and the Respondents and PEAL agreed to specific adjustments in respect of VAT periods 09/01 to 03/04.

11.PEAL made a claim for the recovery of output tax. By a letter dated 8 July 2005, PEAL’s representative, Simon Levine, a tax advisor, wrote to the Respondents’ Voluntary Disclosure Unit to claim a repayment of £278,399 output tax incorrectly accounted for on sales made in the periods 08/99 to 06/01 and £36,994 output tax assessed as due for the period 09/01. The Respondents wrote to the Appellants on 31 August 2005 stating that the claim of £278,399 for the periods 08/99 to period 06/01 was capped by virtue of section 80(4) VATA. After further correspondence, HMRC made an offer to settle on 22 December in the sum of £212,112.17 plus interest. An adjustment was made in the amount of £8,305.45 which represented output tax due on the placing of standard rated permanent nurses.

12.On 23 September 2005 Mr Moher, the financial director of the company, wrote to the Respondents’ Written Enquiries explaining that they were “an employment agency specialising in the placing of dental nurses on a temporary basis with dentists” and then went on say “that we act as a principal in the supply of dental nurses” and the fact we are a principal for VAT purposes “was the main reason that we got VAT exemption in 2001 as we are deemed to be supplying the dental nursing services, which is exempt from VAT”. The letter requested confirmation that “we are still fully exempt from VAT in the supply of these dental nurses on a temporary basis”.

13.On 26 September 2005, the Respondents stated that “without sight of the agreements I am unable to confirm the VAT position for you”. On 3 October 2005, Mr Moher senta copy of PEAL’s “temporary placement contracts (with the dentists)” together with a small selection of invoices. The Respondents confirmed on 13 October 2005 that on the basis of the information provided PEAL’s supply of temporary dental nurses were exempt to PEAL.

14.On 26 March 2009, the Appellant’s representative, Mr Levine, made a claim pursuant to the Fleming case for a reclaim of VAT in the sum of £609,119.31 output tax which had been overpaid in the periods January 1985 to December 1996 together with interest. This constitutes the Claim for the purposes of this appeal.

15.On 22 July 2009 the Respondents rejected the Claim. They explained that their view of the law had now changed and “an extensive review of concessions has been conducted. HMRC has received legal advice to confirm that supplies of staff are not care or medical care, and that the published guidance amounted to an informal concession” The Respondents accepted that at the time the previous advice was given to the Appellant it reflected their view of the law, at that time. A review was requested by the Appellant and the HMRC decision was upheld on 29 October 2009.This is the basis of the Appeal.

Relevant Legislation

16.Article 13(A)(1) of Directive 77/388/EEC (the “Sixth Directive”) provided, so far as relevant, that the following supplies should be exempt from VAT:

“…

(b)hospital and medical care and closely related activities undertaken by bodies governed by public law or, under social conditions comparable to those applicable to bodies governed by public law, by hospitals, centres for medical treatment or diagnosis and other duly recognised establishments of a similar nature;

(c)the provision of medical care in the exercise of the medical and paramedical professions as defined by the memberState concerned;

…

(e)services supplied by dental technicians in their professional capacity and dental prostheses supplied by dentists and dental technicians;

…”

17.Section 80 VATA 1994, provides so far as relevant:

“(1)Where a person –

(a)has accounted to the Commissioners for VAT for a prescribed accounting period (whenever ended); and

(b)in doing so, has brought into account as output tax an amount that was not output tax due;

the Commissioners shall be liable to credit the person with that amount.”

18.Group 7, Schedule 9 VATA as originally enacted (and which essentially reproduced the relevant provisions of the predecessor Act of 1983) provided for the exemption of the following:

“Item No

2.The supply of any services or dental prostheses by –

(a)a person registered in the dentists’ register;

(b)a person enrolled in any roll of dental auxiliaries having effect under section 45 of the Dentists’ Act 1984; or

(c)a dental technician.”

19.Note 2 to Group 7 provided:

“(2)Paragraphs (a) to (d) of item 1 and paragraphs (a) and (b) of item 2 include supplies of services made by a person who is not registered or enrolled in any of the registers or rolls specified in those paragraphs where the services are wholly performed or directly supervised by a person who is so registered or enrolled.”

The Respondents’ submissions

20.The Respondents submit that Item 2, Group 7, Schedule 9 VATA provides for exemption (and properly construed it has always provided for exemption) in respect of services supplied to patients by appropriately qualified (or supervised) individuals.

21.Exemption in respect of dental care

1.Item 2 does not provide exemption in respect of the supply of staff to dentists, and, properly construed, never has so provided.

2.The supplies which the Appellant made to her dentist clients were not supplies to dental patients. They were supplies of staff to dentists and therefore standard rated. There is nothing in Article 13A (1) of the Sixth Directive that requires Member States to exempt a supply of staff to dentists.

3.The Respondents do not dispute that throughout the period covered by the Claim their own interpretation of the relevant law was that the supply of dentists and dentist auxiliaries by a registered nursing agency constituted an exempt supply of dental care or dental services.

Following the House of Lords decision in R (on the application of Wilkinson) v IRC [2005] UKHL 30) the HMRC’s practice of issuing extra-statutory concessions and their legal interpretations which,for whatever reason, they considered may have led to them extending the availability of exemption beyond that required by the Sixth Directive. They felt that they provided exempt treatment under Group 7, Schedule 9 VATA of supplies which should not be exempt pursuant to Article 13 (A) (1). They concluded subsequentlythat the correct legal interpretation of the scope of Group 7, Schedule 9 VATA is the supply of staff to dentist is standard rated. In allowing an exemption in respect of supplies of staff to care providers by nursing agency they were operating outside the scope of Article 13 (A)(1).

4.The Respondents reviewed their policy in 2007 and concluded that their interpretation of the law with regard to the scope of Group 7 was incorrect and they have acknowledged this position. They continued, as a matter of concession, to allow exemption to businesses whose supplies continued to meet the criteria applied prior to the change of interpretation of the law. In spite of this position, they have said that output tax is properly due on such suppliesand the concessionary treatment does not change the position.

5.As applied to this case, the Respondents believe that the Appellant properly accounted for VAT on their supplies.

6.Section 80(1) VATA provides that where a person has accounted for VAT and in doing so has brought into account as output tax an amount that was not output tax due, the Respondents shall be liable to credit the person with that amount. The Respondents believe that since VAT was properly due they have no power to credit the Appellant with the output tax claimed and cite the decision in Wilkinson.

7.The Respondents say at the time they repaid PEAL the output tax, they had not yet carried out the policy review which led to the revision of the scope of Group 7, Schedule 9 exemption.

8.In so far as the repayment made to PEAL represented repayment of an amount of output tax, in repaying that amount the Respondents acted as they considered themselves obliged to act by section 80(1). The Respondents believed that no tax is due to be repaid in the circumstances.

9.The Respondents have outlined arguments with respect to unjust enrichment and input tax but this is not the subject of this appeal.It is a matter for another appeal or hearing if the Appellant is successful.

22.The unjust enrichment argument briefly summarised is as follows.

(a)If the Tribunal were to determine in favour of the Appellant that the output tax was not output tax due by charging their clients VAT, the Appellant would have received output tax on the supplies their clients would be entitled to repayment of tax and the Appellant would have been unjustly enriched by receiving the payments of VAT. The appropriate calculation would have to be done to establish whether in fact the Appellant has been unjustly enriched. That calculation would also reduce input tax that the Appellant would be entitled to claim by virtue of being apartially exempt business. Therefore,should the Tribunal decide in favour of the Appellant the Respondents will have to create a calculation showing the appropriate attribution of the Appellant’s input tax.

The Appellant’s submission

23.The Appellant first makes certain submissions regarding the Respondents’ interpretation of the law. They draw reference to VAT leaflet 710/2/83 which sets out HMRC’s view of the law and the VAT treatment of agencies. In that leaflet, it is stated that the liability of nursingagencies to account for VAT depends on:

(i)whether the agency acts as agent or principal;

(ii)whether the worker carrying out the nursing care is a nurse or nursing auxiliary; and

(iii)in the case of a nursing auxiliary, whether the nursing care is being carried out in a hospital or institution (defined in the leaflet by reference to Item 4, Group 7 of the Exemption Schedule of the VAT Act 1983) or under the direct supervision of a registered health professional listed in Item 1 Group 7.

24.The leaflet goes on to say in paragraphs 2 and 3 that if the agency acts as principal in either the circumstances set out in (ii) and (iii) above it is making a single exempt supply.

25.The Appellant asserts that the leaflet shows HMRC’s view of the law with regards to whether the agency acts as agent or principal and it states:

“Whether an agency is an agent or a principal is determined solely by the contractual relationships between the parties involved – the worker, the agency and the client …

You are an agent only if you have agreed with someone else that you will act as their agent. Customs and Excise require evidence that such an agreement exists, before it can be accepted – for VAT purposes – to be contained in your published terms of trading, such as brochures describing the services you offer and in the various forms you use in transactions between you and the worker and between you and the client.

If you claim to be agent of the worker it would be expected that the conditions of the worker’s membership of your agency would include a statement that you do act as agent of the worker. This would imply that the worker has agreed to that particular contractual relationship with you.

If you claim to be the agent of the client it would be expected that your agreement with the client includes a statement that you do act as the agent of the client. In this event you have offered to act as the agent of the client and the client has been made aware of the terms of your offer. By taking up the offer, the client is assumed to have agreed to that particular contractual relationship.

If a worker is your employee (i.e. if he or she is under a contract of service with you) then you will always be acting as principal in your supply of the worker’s services to the client. …”

26.The Appellant says that HMRC’s view, as stated in the Leaflet has been maintained for some time and certainly throughout the period of the Claim between 1985-1996.

27.This view of the law was maintained in Notice 701/57 of March 2002 (paragraph 3.4-3.7) and it remained the view of HMRC in Notice 701/57/07 of January 2007 (paragraph 4.4-4.6). The latter leaflet draws reference to Notice 700- “the VAT Guideto assist in determining whether they act as agent or principal.”

28.The Appellant draws reference to the fact that the case of Reed Personnel Services Ltd [1995] STC (588) (“Reed Personnel”) whichhad been heard and decided when the Respondents had made their decision on PEAL’s supply in September 2001.

29.The Appellant draws reference to the Respondents’ own internal guidance VI-5 3.22 which discusses the Reed Personnel case as follows:

“In the field of nursing agencies, traders may seek to draw up agreements along the lines of those used in the Tribunal/High Court cases where the appellants were found to be acting as agent, notably British Nursing Co-operation Ltd LON/91/1696Y, August 1992 (8816) and Reed Personnel Services Ltd, QB [1995] STC 588. If the contractual arrangements have changed and the working practices of the bureau are not inconsistent with an agency relationship, you should accept that anew relationship has been created.”

30.The Appellant says that in Reed Personnel, Justice Laws,(as he then was), observed that contractual documents set out the rights and obligations of the parties concerned in private law, they do not necessarily establish the VAT position. This can only be ascertained by examining the whole facts of the case.