Is joint employment dead in the water?
Our founder and Managing Director Nick Regnier looks at the FTT determination in respect of two riverside developments and speculates that the joint employment ‘fiddle’ may have had its day.
I’ve written before on the subject of joint employment (see here and here) so I won’t repeat what I have said before about the suitability or dare I say it, lawfulness of joint employment arrangements for on-site staff.
Before I update you on the 9 June 2023 46-page First-Tier Tribunal determination in Fairleigh and others v St George South London Ltd and others [2023], I have a confession to make: joint employment is hurting my business and other businesses doing the right thing.
My company, Cledor, took (and refreshed) professional advice on the use of joint employment, where porters, concierges, estate managers etc have two employers rather than one (e.g. a personnel provider and an RMC as the two employers). After all, some of our competitors were (and are) actively promoting it. The advice we received: Don’t do it.
If you read no further than this, ask yourself: “Why would on-site staff employment be deliberately overcomplicated like this?” The answer is simple: to avoid paying VAT.
Naturally, this 20% saving appeals to developers, freeholders, RMCs, RTMs and the service charge payers, depending on the exact circumstances. I mean, given the choice of paying VAT or avoiding paying VAT, you’re going to choose the latter, as long as someone else is taking the risk, naturally.
And that’s the point. It’s risky.
It’s risky to deliberately overcomplicate the employment of a member of on-site staff to reduce the cost of staff provision. Why? Because HMRC is losing out and they’re not known for sitting back and taking the hit.
For the last few months, I have looked forward to the determination of Fairleigh and others v St George South London Ltd and others, having heard some time ago that the case concerned the treatment of VAT on the cost of on-site staff.
This was a section 27A Landlord & Tenant Act 1985 application to ascertain the reasonableness of a service charge. Briefly, a group of leaseholders were aggrieved at having to pay their contribution of around half a million pounds in VAT on top of the cost of the site staff. I hasten to add that the total number of service charge payers across these two expansive developments – St George Wharf and Battersea Reach, London SW18 – is about 2,500, so some simple maths shows that we’re talking about a relatively small sum of £200 average per flat per annum (the tribunal came up with an average of £160). Still, it was enough to take various landlords to tribunal for what turned out to be a 9-day hearing and involved 8 barristers and 3 KCs!
To give you some context, these are expansive, multi-phase residential-led mixed-use schemes constructed over 27 years. There are various landlords on both developments, but one managing agent, Rendall & Rittner (R&R), is also the employer of all site staff.
Various leaseholders (the applicants) took 14 landlords (the respondents) to tribunal to argue that the landlords (or at least some of them) ought to be employing the site staff directly, as direct employment would mean VAT is not applicable. Therefore, they contended that the landlords were levying unreasonable service charges. The applicants argued that switching the staff from R&R employment to landlord employment would not change the service and would cause little disruption.
The leaseholders very much wished to return to the situation pre-September 2018, when R&R (and no doubt the majority of block management companies) were not adding VAT to the cost of the staff under their employment. Back then, HMRC was either turning a blind eye to the ‘missing’ VAT or monitoring matters closely and building up a head of steam. I suspect it was a bit of both and in September 2018, HMRC made their position clear, and VAT had to be charged. R&R wrote to their leaseholders about the change and the extra 20% that would be applied from 1 November 2018. During the following year, the leaseholders requested that the staff be transferred to the employment of the relevant landlord, with the aim of removing the 20% burden.
R&R took legal advice and unsurprisingly, the advice accorded with HMRC’s September 2018 guidance note. R&R went further and looked at joint employment as an option. They roundly rejected the joint employment option for half a dozen reasons, as detailed in the Fairleigh determination.
HMRC could determine that such an arrangement is not VAT-exempt because of the cross-deployment
The approach would be too unwieldy to be effective
There could be serious employment issues around staff being employed by unconnected joint employers…
… and working for different landlords
The benefits of VAT savings would be lost given the cross-monitoring of the employing companies, and
If each landlord company employed its own staff, more staff would be needed, wiping out the VAT savings, assuming the same level of service is required (which it would be).
Despite the above, the leaseholders pressed on and in September 2019, they brought the case to tribunal (both developments, simultaneously). The FTT gave both sides 8 months to negotiate a settlement. That did not materialise, so the hearing went ahead.
Here are some key points with respect of joint employment from the determination:
The leaseholders contended that “the practicalities of joint employment should not necessarily cause difficulty and that there is nothing artificial or uncommercial about the respondents collaborating to discharge their contractual obligations by providing a jointly employed pool of staff on site” – and that’s in the full knowledge that joint employment is a means to avoid VAT!
The respondents submitted that “the Employment Appeal Tribunal has been consistently sceptical of the notion that an individual can have multiple employers at the same time.”
The panel explained that, inevitably, there would be challenges where there is more than one employer.
The panel further explained that “joint employment must incorporate an inherent risk that it may not succeed”.
There were discussions with expert witnesses about the cost of transferring employment to direct or joint employment. Essentially, the applicants said “minimal cost”, and respondents said the complete opposite.
One expert witness concluded that if the landlords adopted joint employment, this would result in additional costs, duplication of roles, a loss of economies of scale and a potential reduction in the standard and level of service delivered – and the panel agreed.
The same expert witness calculated that the costs of moving to and maintaining joint employment were even higher than the costs of moving to and maintaining direct employment, and in either case, the cost of moving and ongoing costs was much higher than the VAT saving!
Two other expert witnesses stated that joint employment would be subject to punitive set-up costs and ongoing costs in excess of the VAT saving.
Another expert witness made the important point that the landlords had little incentive to “diversify from [their] property development business to take on the landlord obligations and management functions [such as employing the staff] … with no financial return for providing those services, whilst owning those significant risks.” Quite.
The panel said that “there was and is a real, non-trivial, risk of HMRC interest in the arrangements, as an impermissible species of tax avoidance and/or abuse of rights”.
The panel added: “The principal feature attracting attention would be the continuing involvement of R&R, because HMRC would - in our view, inevitably, ask why the model had been implemented in the way that it had, where the only apparent benefit to the taxpayer was the saving of VAT.”
“It is said that HMRC could launch a wide-ranging enquiry and if they did so then lengthy and detailed correspondence between the VAT technical team at HMRC and the respondents' professional advisers can realistically be expected to ensue. It is tolerably clear that any inquiry by HMRC, regardless of scope, has the potential to be searching, prolonged, and correspondingly expensive.”
A section 20B (Landlord & Tenant Act 1985) point was made too. If, post-model change to joint employment, HMRC decided the supplies were non-VAT exempt and VAT had to be charged out retrospectively, the ‘18-month rule’ would prevent the various landlords from recovering circa £500,000 per annum.
In conclusion
The dominant theme of the tribunal, at least in respect of joint employment, is that an adopted on-site staffing employment model where VAT is deliberately avoided may well amount to an abuse punishable by years of back-dated VAT plus penalties.
HMRC will be reading this determination with much interest, not least as the VAT lost to such an arrangement at St George Wharf and Battersea Reach would amount to millions of pounds over several years for just 37 employees. Extrapolate that across the country’s staffed residential developments, and the VAT ‘savings’ could conceivably run into billions.
If you are participating in the joint employment ‘fiddle’, you might do well to obtain some legal advice before it’s too late. The leaseholders at these riverside developments may well have given up their expensive challenge. Is joint employment dead in the water? I think so.