Housing associations, charities and financial services companies that rely on temporary staff could pay millions of pounds more in VAT charges to recruitment agencies, after HMRC said it would disregard a tribunal ruling on how much VAT should be applied to the supply of temporary workers.
In March, the First-Tier tribunal hearing involving Reed Employment v HMRC (TC01069) found that the employment agency was entitled to charge VAT on only the commission element of its charges to clients rather than the full amount invoiced, which included the worker’s pay, tax and National Insurance Contributions. HMRC did not appeal the decision.
Tribunal decisions are not binding beyond the parties involved, however, and a previous tribunal decision on VAT and temporary workers (Hays Personnel Services, LON/95/2610) went the other way. The tribunal decided that Hays, a recruitment company, should charge for the full amount invoiced.
In a briefing note published on 24 August, HMRC said it doesn’t regard the Reed tribunal decision earlier this year as having “any wider impact” on how VAT is charged for employment bureau services.
A recruitment agency that introduces temporary workers to employers is viewed as an “agent” under the tax system, and should only apply VAT on the commission element of its charges to clients rather than the full amount invoiced, HMRC said.
According to its guidance, recruitment agencies that have contracts with their employees are supplying staff to employers and are defined as “principals” for VAT purposes. These agencies should, therefore, charge clients VAT on all services rather than just the commission. These rules were outlined in more detail in previous HMRC guidance – VAT Information Sheet 03/09.
Martin Sharratt, director, head of VAT at financial advisory firm Smith & Williamson, said that rules for charging VAT on temporary staff could take months, or even years, to resolve.
“It now seems inevitable that it will take another case to resolve the issue and the position will, for months or perhaps years, remain unclear,” Sharratt wrote in a briefing note on HMRC’s response to the tribunal decision.
Employment businesses and their customers will need to keep a close watch on developments in this area, Sharratt said, adding: “It is clear from the Reed decision, and indeed from HMRC’s response, that the VAT treatment will depend on a close analysis of the facts – both the contractual terms and the commercial reality.”
