In ELS Group Limited v HMRC [2016] EWCA Civ 663 the Court of Appeal found that a VAT Extra Statutory Concession (ESC) could not be applied retrospectively.

The ESC in question related to VAT on supplies of services by employment bureaux and was previously found in Business Brief 10/04 (BB10/04).

Broadly, for VAT purposes an employment bureau either acts as:

  • A principal in supplying its own personnel to the client with VAT charged on the whole sum payable (including salary costs), or
  • As an agent in finding employees for its clients with VAT only charged on the commission payable.

This led in the mid-1990s to an increasing trend for employment bureaux to adopt an agency model, taking on self-employed staff rather than employees and supplying these to their clients.

To counteract this HMRC introduced what was intended to be a temporary ESC known as the ‘staff hire concession’.  Under this ESC bureaux acting as principals could choose to be treated as agents instead for VAT purposes provided they supplied their own employees to clients. 

In this case:

  • ELS supplied lecturers to further education colleges in the UK.
  • It originally claimed exemption from VAT on the grounds it was an eligible body making an exempt supply of education.
  • HMRC challenged this exemption, claiming the company was not an eligible body but accepting that it made educational supplies rather than supplies of staff.
  • To get round this, ELS established a new company (PNL) to take on its business.  HMRC eventually accepted that PNL could benefit from the ESC above.
  • However, not all colleges wanted to change supplier, and ELS continued to contract directly with them, issuing invoices for a lump sum with no VAT shown.
  • ELS argued that, as there were no differences between its supplies and those made by PNL, it should also benefit from the concession.
  • HMRC rejected this retrospective application of the concession, arguing that ELS had not made the choice to be taxed as an agent at the date of the relevant supplies and that this choice could not be made with retrospective effect.

The Upper Tribunal agreed with HMRC’s position, as did the Court of Appeal who found that:

  • The language of the concession was forward looking, and there was nothing to indicate that the choice to be treated as an agent could be made retrospectively.
  • ESCs such as the one in question operate, effectively, as a decision by HMRC not to collect tax otherwise due and therefore should not be given any greater scope than a fair and normal reading.
  • There is no statutory machinery in the VAT Regulations to permit a subsequent choice to be taxed as an agent to have retrospective effect.
  • The fact that this might prevent taxpayers (like ELS) who have attempted but failed to obtain exemption for past tax periods from claiming the benefit of the concession was neither here nor there.
  • The invoices raised by ELS, in the absence of any convincing evidence to the contrary, made it difficult to see how the company could be have chosen to be treated as an agent making supplies of staff at the time of supply.

The taxpayer’s appeal was therefore dismissed.


Case reference: ELS Group Limited v HMRC [2016] EWCA Civ 663