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HMRC ignores Reed VAT verdict

7th Sep 2011
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Housing associations, charities, and financial services companies who 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. Nick Huber reports.

In March, the First-Tier tribunal hearing Reed Employment v HMRC (TC01069) found that the employment agency was entitled to charge VAT only to 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 didn’t appeal the decision (TC).

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” for the 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 HMRC’s 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 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 clients 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.”

Replies (3)

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By abelljms
12th Sep 2011 11:56

clarity please.....

so the article is saying (in English)....? "agencies invoicing for temporary staff must charge vat on the full charge?"

This may change once a pile of overpaid lawyers have been applied to the problem despite this flying in the face of logic. E.g. My builder - in future i will ask him to only charge me vat on their profit margin for the labour element. ... actually not a problem as of course he only takes cash!

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By Alonicus
12th Sep 2011 19:08

Are HMRC above the courts ?

I see why HMRC are taking this approach; it means that for organisations unable to reclaim VAT, they effectively increase ER NI by 20%.  A nice little earner for the exchequer at the expense of charities etc.


But I am deeply concerned that the underlying agenda is that HMRC are attempting to establish the precedent of being the final arbiter when it comes to interpreting tax law.  To my mind, this breaches one of the fundamental principles of the (unwritten) English constitution, the separation of legislative (Parliament), judiciary (courts and tribunals) and executive (HMRC and similar government bodies).  Once HMRC have established the precedent of being able to ignore court judgements, what recourse will be left to challenge them when they make mistakes or overstep their remit ? 

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Replying to BJ:
By abelljms
13th Sep 2011 09:06






Of course the “agenda is more tax”, as that is what their sole purpose is

- but then MY agenda is to increase my personal earnings, a business agenda is to increase profits etc - it's all no surprise.


the only restraint on HMRC is politicians via the finance acts to limit their activities. Without politicians IR35 would have destroyed the non-employee employment market within two years. And how much do we appreciate the ‘efforts’ of politicians?! – no wonder it’s all a muddle.



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