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Employment Agency Caught in European Law Quandary

In a controversial ruling that underlines the primacy of European law where it conflicts with domestic legislation designed to implement it, a company that provides locum anaesthetists to fill staffing gaps within the NHS has failed to convince the First-tier Tribunal that its services should be treated as exempt from VAT.

The company argued that its supply of overseas consultant anaesthetists to the NHS fell within the exemption provided by the VAT Act 1994 in respect of the provision of deputies for registered medical practitioners. However, HM Revenue and Customs (HMRC) insisted that the exemption could not apply as the company operated as an employment agency and did not supply medical care.

Noting that the locum anaesthetists are employed by their own offshore companies or by the NHS trusts for which they work, and that the company has no day-to-day control over their activities, the Tribunal found that the company was not engaged in the provision of medical care. Nevertheless, the Tribunal ruled that, as a matter of purely domestic legislation, the company’s activities fell within the clear wording of the exemption, which made no explicit mention of medical care.

However, the Tribunal found that the domestic exemption had been too broadly drafted and had to be interpreted in conformity with the narrower exemption provided by Article 131 of Council Directive 2006/112/EC. Such a restrictive construction was also required by the principle of fiscal neutrality and, on that basis, the company’s activities as an employment agency could not qualify for the exemption.

The decision meant that the company would have to register for VAT and might be subject to substantial retrospective assessments in respect of its past supplies. However, the Tribunal acknowledged that the company had acted responsibly in seeking guidance from HMRC on the correct interpretation of the exemption and that it would view the outcome of its appeal as ‘highly unsatisfactory’.

Given the ‘unfortunate’ and ‘problematic’ state of the domestic legislation, it could be argued that the company had a legitimate expectation that it would be allowed to benefit from the exemption. In those circumstances, the Tribunal urged HMRC to be circumspect in examining the consequences of the decision and to view the company’s position sympathetically.