In what will come as a major disappointment for organisations unable to recover VAT charged by employment agencies, the VAT tribunal has confirmed HMRC’s position that VAT must be charged on the full amount received by employment agencies, rather than just on the commission received.
The earlier VAT tribunal decision of Reed Employment Ltd had cast doubt over the VAT liability of the provision of temporary workers. The tribunal, having determined that Reed was supplying introductory services, considered that VAT should be charged on the commission element only. Despite the fact that HMRC did not appeal the Reed decision, it did state that the decision was not binding on any other employment businesses.
Nevertheless, inspired by Reed, many businesses, particularly in the charity and financial sectors, encouraged their temporary staff providers to submit VAT refund claims in the hope that any refund would result in a windfall being passed on to them. Adecco was one such employment agency and, having been refused a VAT refund of over £11m, appealed to the tribunal in anticipation that it too would come to the same conclusion as Reed.
However, the Adecco tribunal reached a different conclusion. Whilst conceding that ‘…this is an unfortunate outcome in the sense that two tribunals have reached diametrically opposed conclusions on the same issue, potentially giving one competitor in the same market [Reed] a financial advantage over another’, the tribunal in Adecco considers that contractually, economically and legally, employment agencies supply temporary staff workers to the end users, and VAT must therefore be charged not only on the commission fee for the introduction of temporary workers, but also on the temporary worker’s remuneration, PAYE, NIC and so on.
Given the large VAT sums involved, we would expect an appeal to a higher court.
Meantime, HMRC will maintain that where hirers have the liability to pay the wages and employment costs of contract workers, VAT applies only to the introduction services, but where the employment agency has the liability to pay the wages and employment costs of temporary workers, VAT must be charged on these costs to the hirers.
And just a quick footnote - it should be remembered that, by concession, nursing agencies (or employment businesses that provide nurses, nursing auxiliaries, care assistants and other health professionals) may, in certain circumstances, treat their supplies of temporary workers as exempt from VAT.