Potential changes to VAT charging for agencies

A recent case between Reed Employment Limited and HMRC has the potential to open the flood gates to claims from agencies for overpaid VAT, and a change to the VAT landscape going forwards.

Until 2009, employment businesses were able to gain the benefit of a Staff Hire Concession allowing for VAT not to be chargeable on a certain element of their invoices where they were supplying into sectors where VAT is not fully recoverable. This was withdrawn, causing agencies to either increase costs with their clients or reduce their profit margins.

However, a new decision by the First-tier Tribunal, indicates that agencies may be able to charge VAT only on the margin element of their invoices to clients, and need not charge VAT on the payments being made to candidates or the National Insurance element.

In this case, Reed, acting as an employment business, argued that the fee for its service was only the margin element charged to the client and as a result, it is only this element which should be subject to VAT. HMRC argued that the service being provided by Reed was the supply of staff and as such VAT should be chargeable on the entirety of the client invoices.

The Tribunal, in making its decision that favoured Reed, determined that Reed was in practice offering only “introductory services with other ancillary services, including evaluation of the temporary worker’s capabilities, the taking of references and a payments service with respect to the payments of the pay rates to the temp worker”, as opposed to offering a service of the supply of staff. In making this distinction, the Tribunal placed emphasis on the lack of mutuality of obligation between Reed and the worker and the lack control over the worker after the introduction had occurred.

It is understood that HMRC does not intend to appeal this decision. Therefore, as it currently stands, this ruling appears to allow agencies to consider whether they have correctly been charging VAT on the entirety of their invoices and potentially change their practices.

A word of caution though. The claims related to periods from 1973 to 1996 and the reluctance of HMRC to appeal may be related to that. The decision is also only from a First Tier Tribunal and does not carry the weight of, for example, the Court of Appeal.

For more advice and for those wishing to avoid VAT charges should please call Lawspeed on 01273 236 236.

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