Supplies of staff or supplies of underlying services

The Upper Tribunal has held that arrangements under which a company employed doctors and consultants and provided them via an intermediary to NHS hospitals was a taxable supply of staff rather than an exempt supply of medical services: Mainpay Ltd v HMRC [2021] UKUT 270. The Tribunal rejected the contention that there must be an assignment of control of the worker to the client for a supply of staff to take place.

The decision highlights that, in determining the true nature of a supply, it is important to take into account all the relevant circumstances, especially the contractual arrangements. In particular, in cases involving a supply of staff or a supply of the underlying services, the question of control of the activities of the person carrying the work was important, but not necessarily determinative, particularly where the individual concerned was (as here) a very highly skilled individual where little day-to-day control would actually be exercised either by the provider or the client.

Background

Mainpay employed various doctors and consultants which it placed, indirectly via another agency called A&E, into hospitals. The contractual arrangements involved (1) an employment contract between Mainpay and the medical practitioner, (2) a contract between Mainpay and A&E under which Mainpay supplied medical practitioners to A&E to carry out specified roles and (3) contracts between A&E and NHS trusts. In practice, A&E identified an assignment with the NHS and would introduce a consultant. If the consultant agreed to the position, then A&E would inform Mainpay. Mainpay’s role would largely be limited to payment and payroll activities. It had no independent medical expertise and relied on a third company in recruiting consultants and carrying out necessary checks. Consultants rarely if ever contacted Mainpay over anything but payroll issues. The FTT had considered that “the perception of consultants would have been that Mainpay was simply providing a tax efficient payroll function”.

Mainpay argued that the amounts that it received from A&E for its supplies fell within the exemption in Article 132(1)(c) as “the provision of medical care”. In particular, in its agreement with A&E, Mainpay agreed to “ensure that assigned employees shall provide the Services for the client”, with those Services being defined as those in a schedule agreed between A&E and the NHS Trust concerned. As such, Mainpay argued that it was carrying out the underlying services of providing medical care via its employees.

The FTT held that the supplies made by Mainpay did not fall within the exemption. In particular, the “framework of control” over the activities of consultants passed to the NHS under the arrangements and Mainpay in reality retained no control over what consultants did. Mainpay’s supplies amounted to supplies of staff rather than medical supplies.

Decision of the Upper Tribunal

The Upper Tribunal had little trouble in upholding the FTT decision and rejecting the criticisms of that decision put forward by Mainstay. In particular, the Tribunal rejected the argument (based on the decision in Adecco) that a supply of staff required there to be a assignment of control to the client. In this case, the seniority of the medical practitioner meant that only they had control over their decision making and so there was no such assignment of control to the NHS.

A correct interpretation of the Adecco decision was that whether there was a supply of staff depends on all the circumstances, particularly the contractual arrangements, and that control is one (albeit a significant) factor. The FTT had correctly based its decision on a consideration of all the factors, including the contractual provisions and the question of control. The Tribunal noted that this particular scenario involved highly skilled specialists and so the amount of control that the person engaging that worker may exercise day-to-day is very limited. Rather, in this case, the consultants would have been under the general direction and control of the hospital where they worked in relation to the provision of treatment and drugs, such that the general “framework of control” over the way in which a consultant worked had been transferred to the NHS hospital.

The Tribunal also rejected the argument that the activities of consultants should in essence be imputed to Mainpay (their employer) based on the wording of Article 10 of the Principal VAT Directive. This article prevents the activities of employees being treated as an independent economic activity for VAT purposes. Again the Tribunal rejected this argument. Whilst accepting the fact that the activities of employees are treated as part of the economic activity of the employer for VAT purposes, “that does not mean that every characteristic or attribute of the employee… is thereby deemed to belong to the employer. In this case, as a matter of economic and commercial reality, it is impossible to say that Mainpay, an entity which had no medical qualification nor any medical expertise or knowledge, exercised any degree of control over the clinical decision-making undertaken by the medical practitioners and Article 10 does not deem it to do so”.

More generally, despite the discussion on the question, the Tribunal also highlighted that the question before it was not whether there was a supply of staff (of which there was no statutory definition), but whether the supply made by Mainpay fell with the scope of the exemption for medical services. On this point, it was significant that there was no evidence that Mainpay held any professional indemnity insurance against negligence, suggesting it was not supplying medical care. In addition, there was nothing in Mainpay’s arguments that either the principle of fiscal neutrality or the overarching purpose of the exemption which required the exemption to be applied to its supplies.

Finally, although the point had not been argued, the Tribunal expressed some reservations over the question whether Mainpay’s supplies could, in any event, fall within Article 132(1)(c) or whether the exemption was in reality limited to supplies made in a hospital environment by the hospital itself.

Comment

The decision highlights the difficult dividing line between a provision of services via employees or even third party contractors and simply a supply of staff. In determining the nature of the supply, the starting point will be the contractual arrangements and in this case it was not clear that these made Mainpay primarily responsible for delivering medical care. Instead, the economic and commercial reality was that Mainpay merely provided qualified consultants who then worked within the “framework of control” of the NHS hospital concerned.

The lack of any real substance in Mainpay, other than in terms of payroll function, was a significant factor in this case. However, the Tribunal also expressed reservations over the extent to which its services, even if they had been the provision of medical care, could fall within the exemption in Article 132(1)(c).

Finally, it is worth noting that, whilst in this case the taxpayer was arguing that it was making the underlying supplies (since they would have been exempt from VAT), in other cases it may be beneficial to argue that the taxpayer is merely providing an introduction service for a commission only (rather than the full amount of any payment).