First Alternative Medical Staffing Ltd v The Commissioners of HMRC

An HMRC extra-statutory VAT concession must be read as an ordinarily sophisticated taxpayer would understand it. A concession permitting a taxpayer to exempt a supply requires a positive choice not to charge or account for VAT when invoicing. It cannot ordinarily be exercised after the taxpayer has committed to a different VAT treatment.

Clear words are required before a concession that relieves tax otherwise due under VAT Act 1994 is given retrospective effect. A taxpayer cannot obtain partial retrospective exemption of a single supply where it has already invoiced and accounted for VAT on part of the consideration. The absence of machinery to reverse an earlier choice under the Value Added Tax Regulations 1995 reinforces that construction.

The appellants were employment bureaux supplying temporary nurses and other medical staff. They had accounted for VAT as agents, charging VAT only on their commission. HMRC assessed them for further VAT after it became common ground that they had in fact supplied staff as principals.

They sought to rely retrospectively on HMRC’s Nursing Agencies Concession, which allowed qualifying agencies to exempt supplies of nursing staff made as principal. A deputy High Court judge rejected that contention in [2021] EWHC 882 (Admin). The appellants appealed, contending that the concession could be applied retrospectively under domestic and EU-law principles and that they had sufficiently exercised the required choice.

The central issue was whether the concession permitted exemption after supplies had been invoiced and treated for VAT on a different basis.

1. Appeal dismissed. The Nursing Agencies Concession could not be invoked retrospectively in respect of the appellants’ past supplies.

2. The applicable question was how an ordinarily sophisticated taxpayer would fairly understand an extra-statutory concession. The concession’s permission to exempt a supply required positive action: the taxpayer had to exclude VAT from its invoice and refrain from accounting for it. Accordingly, the choice had to be made for each supply, at the latest when the client was invoiced. The appellants had instead charged VAT on the commission element of their invoices, which was inconsistent with exempting the supply.

3. The reasoning in [2016] EWCA Civ 663 applied. A concession is in substance HMRC’s decision not to collect tax otherwise due under VAT Act 1994. Clear words would therefore be needed to give it retrospective effect. The concession contained no such indication.

4. Its construction also had to work in the ordinary case. The Value Added Tax Regulations 1995 provided no machinery by which a later choice to exempt could alter the VAT treatment of earlier supplies. Retrospective operation would conflict with Regulation 35, rather than merely cause practical inconvenience.

5. The appellants’ supply was a single, indivisible supply of staff. The concession allowed exemption of the whole supply, with no VAT charged. It did not allow exemption of only the part of the consideration on which VAT had not been charged. The treatment sought was in substance the agency-services treatment which the appellants had incorrectly adopted.

6. EU-law principles did not alter that conclusion. The authorities relied on showed only that a different tax treatment may sometimes have retrospective legal effect; they did not assist in construing this concession. Nor could what HMRC may have understood in 2004 amount to an election to exempt supplies made between 2013 and 2016.

• Court of Appeal (Civil Division): Dismissed the appeal and upheld the conclusion that the Nursing Agencies Concession could not be used retrospectively.

• High Court, Administrative Court: In [2021] EWHC 882 (Admin), held that the appellants could not retrospectively rely on the concession. The judge also held that reliance on the 2004 HMRC letter as creating a legitimate expectation had ceased by 2013.