Mercy Global Consult Limited (in liquidation) v Abayomi Adegbuyi-Jackson & Ors

On 9 October 2022 the First, Third, Sixth to Eleventh and Thirteenth to Fifteenth Defendants (“the Appellants”) applied: (i) for permission to amend their Defences to advance a defence (“the VAT Defence”) that the Claimant (“MGC”) made supplies that were exempt from VAT by virtue of Items 1 and/or 4 of Group 7 of Schedule 9 to the Value Added Tax Act 1994 (“VATA”); and (ii) for an order that the VAT Defence be tried as a preliminary issue. By order dated 5 May 2023 Richards J dismissed both applications for the reasons given in his judgment dated 31 March 2023 [2023] EWHC 749 (Ch). In short, the judge held that the VAT Defence was precluded by the decision of this Court in Mainpay Ltd v Revenue and Customs Commissioners [2022] EWCA Civ 1620, [2023] 3 All ER 912. The Appellants appealed with permission granted by Newey LJ. At the conclusion of the oral argument with respect to the Appellants’ challenge to the judge’s decision on the application for permission to amend their Defences, the Court announced that the appeal would be dismissed for reasons to be given subsequently. My reasons for agreeing to that disposition of the appeal are as follows.

MGC was incorporated in 2011. It employed a number of employees who the judge described for convenience as “healthcare professionals”, recognising that this is both a broad, and therefore somewhat imprecise, term, and also that it is something of a simplification since not all of MGC’s employees were healthcare professionals.

The Appellants allege (and for present purposes it must be assumed that these allegations are factually correct) that, until it went into liquidation, MGC’s business operated in the following manner:

At the time it was carrying out this business, MGC thought (the Appellants say mistakenly) that at least some of the supplies that it made described in paragraph 3 above were standard-rated for VAT purposes, except to the extent that a particular concession (the details of which it is unnecessary to go into for present purposes) applied.

HMRC carried out an investigation into MGC’s activities which culminated in it making assessments on MGC for under-declared VAT totalling some £21 million (“the Assessments”). This led to MGC becoming insolvent and entering liquidation.

In these proceedings MGC alleges that this under-declared VAT was the result of a significant VAT fraud perpetrated between at least 2015 and 2020. The VAT fraud is said to consist of MGC charging Secondees VAT and, save for small sums, not accounting to HMRC for that VAT, hence the under-declaration resulting in the Assessments.

MGC alleges that the VAT was misappropriated by the First Defendant, Mr Adegbuyi-Jackson, who was at all material times MGC’s sole shareholder, with the assistance of the Sixth Defendant (Mr Adegbuyi-Jackson’s wife), the Tenth Defendant (Mr Adegbuyi-Jackson’s half-brother) and various corporate Defendants. MGC seeks equitable compensation from Mr Adegbuyi-Jackson for fraudulent breach of duty and proprietary remedies in respect of sums he has received. It makes proprietary claims against Mrs Adegbuyi-Jackson and the corporate defendants, as well as claims for equitable compensation for dishonest assistance. MGC also makes a claim for unlawful means conspiracy against Mr and Mrs Adegbuyi-Jackson.

By the VAT Defence, the Appellants seek to establish that MGC’s supplies were exempt from VAT by virtue of Items 1 and/or 4 of VATA Schedule 9 Group 7, and hence that MGC does not owe HMRC the £21 million claimed by the Assessments. In the absence of any obligation to pay VAT to HMRC, the Appellants contend that there can have been no VAT fraud as MGC claims.

Article 132(1) of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (“the Principal VAT Directive”) provides, so far as relevant:

These provisions are implemented by section 31 of VATA together with Items 4 and 1 respectively of Group 7 of Schedule 9 of VATA (as amended), which provide:

In summary, the VAT Defence runs as follows:

Mainpay was a company with a similar business model to that of MGC. Mainpay was an “umbrella” company which employed consultants and GP specialists. There was no evidence about the GP specialists, and so attention focussed on the consultants. Mainpay provided the consultants to recruitment agencies, such as one called A&E, who in turn provided them to NHS Trusts. Mainpay charged the agencies a fee which comprised the costs of the employing the consultants and a percentage margin. Mainpay was responsible for paying the consultants their salary and for accounting for their pensions, sick pay, PAYE and NICs. The relevant NHS Trust and the agency in question determined which consultant would fulfil a particular assignment prior to the involvement of Mainpay. HRMC decided that Mainpay’s supplies were taxable at the standard VAT rate. Mainpay contended that its supplies were exempt by virtue of Items 1 and/or 4 of VATA Schedule 9 Group 7. Successive appeals by Mainpay to the First-Tier Tribunal, the Upper Tribunal and the Court of Appeal were dismissed. By the time the case reached the Court of Appeal, Mainpay accepted that Item 4 added nothing to Item 1, and so attention was confined to Item 1. The judgment was given by Whipple LJ, with whom Green and Nugee LJJ agreed.

Having set out the legal framework and summarised the facts, Whipple LJ summarised the FTT’s decision and the UT’s decision. As she explained, the FTT stated in its decision at [23] that the key question was:

On appeal to the UT, Mainpay advanced six grounds of appeal. The first three grounds went to the same point, namely Mainpay’s assertion that the consultants’ clinical decision-making was not under the control of the NHS Trusts. As Whipple LJ noted, the UT remarked on the fact that much of the argument had proceeded on the basis that there was a choice to be made between a supply of staff, on the one hand, and a supply of medical services, on the other hand, with Mainpay arguing that by retaining control over its consultants and specialist GPs it was necessarily making a supply of medical services, not staff. The UT stated at [93] that this was not the question it had to decide:

Whipple LJ went on to summarise Mainpay’s grounds of appeal, various contentions advanced by HMRC by way of a respondents’ notice and the parties’ main submissions. In that context, she noted that counsel for Mainpay had placed most reliance upon the judgment of the Court of Justice of the European Union in Case C-141/00 Ambulanter Pflegedienst Kügler GmbH v Finanzamt für Körperschaften I in Berlin [2002] ECR I-6833, in which the CJEU said at [27] that “just two conditions need to be met” in order for Article 132(1)(c) of the Principal VAT Directive to apply: “medical services must be involved and they must be supplied by persons who possess the necessary professional qualifications”. Counsel for Mainpay argued that Mainpay’s supplies satisfied those conditions. He acknowledged that the emphasis on Kügler at [27] represented a shift in his case, but said that this was in response to the way in which HMRC’s case was now put. As Whipple LJ went on to explain at [47]:

Whipple LJ began her analysis of the issues by saying at [50]:

Whipple LJ dealt with the first point under the heading “Supply of staff or services”, saying:

Having discussed  Reed Personnel Services v CCE [1995] STC 588, Adecco UK Ltd v Revenue and Customs Commissioners [2018] EWCA Civ 1794, [2018] STC 1722, Moher v Revenue and Customs Commissioners  [2012] UKUT 260 (TCC), [2012] STC 1356 and Case C-434/05 Stichting Regionaal Opleidingen Centrum Noor-Kennemerland/West-Friesland (Horizon College) v Staatssecretaris van Financiën [EU:C:2007:343], Whipple LJ concluded at [57]:

Having dealt with the second “preliminary point” under the heading “Framework of control” at [58]-[60], Whipple LJ turned to consider Kügler and a number of other CJEU decisions relied upon by Mainpay. She concluded at [78]:

Under the heading “Commercial and economic reality”, Whipple LJ said:

For these reasons, Whipple LJ rejected Mainpay’s first and principal ground of appeal. She also rejected its other three grounds. She added at [90]:

The judge held that the Appellants should be refused permission to amend their Defences to introduce the VAT Defence because that defence had no real prospect since it was precluded by Mainpay. In reaching this conclusion, he rejected the Appellants’ argument that the conclusion set out by Whipple LJ at [57] was not binding because it was a mere assumption on her part which was not the subject of argument or consideration. Given his conclusion that permission to amend should be refused, it necessarily followed that the application for the trial of a preliminary issue also had to be refused (although the judge said that he would have refused that application in the exercise of his discretion in any event).

On the appeal the Appellants accepted that the proposition of law stated by Whipple LJ in Mainpay at [51], [57], [82] and [90], namely that there is a distinction for VAT purposes between supplies of staff on the one hand and supplies of the services provided by those staff on the other, formed part of the ratio decidendi of Mainpay. The Appellants also accepted that, if that ratio was binding upon this Court, it precluded the VAT Defence. The Appellants argued that it was not binding on this Court for two alternative reasons. First, because it was a mere assumption. Secondly, because it was manifestly wrong. The second argument was not one advanced by the Appellants before the judge. Nor was it advanced in the Appellants’ skeleton argument for the appeal.

In Regina (Kadhim) v Brent London Borough Council Housing Benefit Review Board [2001] QB 955 the Court of Appeal held that a subsequent court is not bound by a proposition of law which, although part of the ratio of an earlier decision, had been assumed to be correct by the earlier court and had not been the subject of argument before, or consideration by, that court. Although the Court considered that this exception to the strict rule of precedent was justified, and applied it in the case before it, Buxton LJ delivering the judgment of the Court cautioned at [38]:

Counsel for the Appellants accepted that the proposition of law stated by Whipple LJ in Mainpay had been the subject of consideration and decision by her, and had not been merely assumed. He nevertheless submitted that it was based upon a prior assumption which had been shared by the parties and by the Court, and had not been the subject of any argument, consideration or decision, namely that the exemptions contained in Items 1 and 4 of VATA Schedule 9 Group 7 had the same scope as Article 132(1)(b) and (c) of the Principal VAT Directive. The Appellants’ case, however, was that the domestic exemptions were broader in scope than the exemptions required by EU law. It followed, counsel for the Appellants argued, that the proposition of law stated by Whipple LJ is not binding.

I accept the premise of this argument. It appears from Whipple LJ’s judgment that it was taken for granted that Item 1 should be interpreted consistently with Article 132(1)(c) and that they were of materially the same scope, and it was also taken for granted that the same would be true of Item 4 and Article 132(1)(b). No argument was advanced that the domestic exemptions were broader than the EU exemptions, nor was that possibility contemplated by the Court.

I do not accept that it follows that the proposition of law stated by Whipple LJ is not binding. Before explaining my reasons, I should record that I have considerable difficulty in seeing how the domestic exemptions can be materially broader than the EU exemptions. Although the wording is slightly different, their substance appears to be much the same. This is particularly so given the broad interpretation placed upon Article 132(1)(c) by the CJEU in Kügler and other cases. Moreover, as is well established, the domestic provisions should if possible be construed consistently with the EU provisions as interpreted by the CJEU. I also doubt that it would have been open to the United Kingdom under EU law to provide for broader exemptions than those required by Article 132(1)(b) and (c). I shall nevertheless assume, without deciding, that the Appellants have an arguable case that the domestic exemptions are broader in scope than the EU ones.

In my judgment this does not detract from the binding effect of Whipple LJ’s statement of the law. The issue before the Court of Appeal in Mainpay was as to the proper interpretation of Item 1 and its application to the facts. It is true that it was assumed that the scope of Item 1 was the same as that of Article 132(1)(c), but nevertheless the Court interpreted Item 1 and held that it did not apply. In interpreting Item 1, Whipple LJ applied the proposition of law she stated, which she considered to be supported by domestic case law, EU case law and ordinary principles of VAT. Even if the domestic exemptions are in some way broader than the EU exemptions, it would remain necessary, on Whipple LJ’s analysis of the law, to distinguish between a supply of staff and a supply of the services provided by those staff. That distinction is not about the precise breadth of the exemptions, it is a more fundamental point about the character of the supplies in question. That explains why, as counsel for the Appellants himself pointed out, one of the cases she relied upon, Horizon College, was a case about the exemption for education services now contained in Article 132(1)(i), and not about the healthcare exemptions.

Even if, contrary to my view, the breadth of the exemptions is relevant to the character of the supplies, the Appellants’ argument is at best one which could have been advanced in Mainpay to counter the proposition upon which Whipple LJ relied, at least in the context of the healthcare exemptions. The fact that a particular argument against a proposition of law has not been advanced or considered does not mean that the proposition is not binding if it is considered by the court and accepted to be correct. In those circumstances the proper remedy is to appeal to a higher court (or, if the prior decision is one by the Supreme Court, to invite that court to depart from its precedent).

Counsel for the Appellants also submitted that it was assumed in Mainpay that Item 4 was no wider than Item 1, whereas the Appellants would if necessary argue that it was. Again, I accept that it was assumed in Mainpay that Item 4 was not relevantly broader than Item 1. Again, I have considerable difficulty in seeing how Item 4 can be broader than Item 1 in any respect which assists the Appellants, but I will assume without deciding that the Appellants have an arguable case that it is. Again, I do not accept that this detracts from the binding effect of Whipple LJ’s statement of the law. My reasons are the same: the comparative breadth of Items 1 and 4 is not relevant to the distinction Whipple LJ drew, and at best this is an argument which could have been advanced to counter that proposition, at least in the context of cases involving umbrella companies such as Mainpay (and MGC).

In Morelle Ltd v Wakeling [1955] 2 QB 379 Sir Raymond Evershed MR delivering the judgment of a Court of Appeal consisting of five judges said at 406-407:

Counsel for the Appellants submitted that this passage established that a prior decision could be held to have been given per incuriam not only where it was given “in ignorance or forgetfulness of some inconsistent statutory provision or of some authority binding on the court concerned”, but also in other “rare and exceptional cases” where the decision, or the reasoning upon which it was based, involved a “manifest slip or error”. I accept this, but I would add that it is plain from what Evershed MR said that this can only apply where the slip or error is truly manifest.

Counsel for the Appellants argued that Whipple LJ’s statement of the law in Mainpay was manifestly wrong. I do not accept this. Although he advanced a series of criticisms of Whipple LJ’s reasoning at [51]-[57], none of them begin to demonstrate manifest error. It is sufficient to concentrate upon counsel’s principal criticism. This is that Whipple LJ confused or conflated two different distinctions. The first distinction is one between (a) merely effecting an introduction of staff without contractually participating in the chain of supply and (b) supplying the services of workers by taking part in the chain of supply. The second distinction is between (a) a supply of staff by taking part in the chain of supply whilst controlling them and (b) a supply of staff by taking part in the chain of supply without controlling them. The first distinction is said to be the correct distinction, and supported in particular by the Reed case discussed by Whipple LJ. The second distinction is said to be a wrong distinction.

Even without getting into the details of the Reed case, this argument does not demonstrate manifest error on the part of Whipple LJ. The distinction she drew is on its face a perfectly coherent one, and it appears to be supported by her discussion of the case law. By contrast, the first distinction drawn by counsel for Appellants is elusive. Even if it is a possible distinction, it is not obvious that the second one is wrong. Nor it is obvious that Whipple LJ confused or conflated these distinctions as opposed to drawing a different one.

Furthermore, Reed does not demonstrate any manifest error by Whipple LJ. Reed is a curious case, and not easy fully to understand. Reed was a recruitment agency which provided temporary nurses to hospitals. Most of the nurses were employed by the hospitals in question, and wanted to get extra work on top of their normal hours. The dispute was about input tax, and it is unclear what the position with regard to output tax was. The Commissioners contended that the supplies which Reed made to the hospitals were supplies of nursing services and thus exempt under the predecessor provisions to Items 1 and 4 of VATA Schedule 9 Group 7. This would mean that Reed could not deduct input tax. Reed contended that the supplies it made to the hospitals were of introducing the nurses and associated obligations, but not of nursing services. This would mean that Reed could deduct input tax. Thus the parties were the reverse way round to what one might expect. The VAT Tribunal found that what Reed supplied was not nursing services, but nurses. Reed supplied its administrative services as agent, the consideration for those supplies being the commission it received. It followed that Reed could deduct input tax (albeit, it would appear, only on the commission).

The Commissioners appealed, arguing that the correct characterisation of Reed’s supplies depended on the correct interpretation of the contractual documents, and that the latter showed that the situation was one of “vicarious performance” in which A is contractually obliged to provide services to B, but does so by the acts of a third party C. Laws J dismissed the appeal for the reasons he gave at 595-596:

Thus the Tribunal found that Reed supplied nurses, not nursing services, and Laws J held that that was a finding of fact which was open to it. That being so, I am inclined to agree with Whipple LJ’s comment in Mainpay at [53] that Reed “stands as an illustration, on its own facts, of a distinction being drawn between a supply of staff on the one hand and a supply of the services by those staff on the other”. But at all events it is far from manifest that she was wrong to read it in that way.

For the reasons given above, I consider that the proposition of law stated by Whipple LJ in Mainpay, that there is a distinction for VAT purposes between supplies of staff and supplies of services provided by those staff, is binding upon this Court. It follows that the judge was correct to hold that the VAT Defence is precluded by Mainpay, and therefore to refuse the Appellants permission to amend their Defences. It further follows that he was correct not to order the trial of the VAT Defence as a preliminary issue.

I agree.

I also agree.