VAT and employment status

If you have ever wondered what bearing VAT registration (and the National Minimum Wage) have on employment status you can now find the answer, or part of it. Recent updates to HMRC’s Employment Status Manual include the addition of a new chapter: ESM5000.

VAT

Where employees act on behalf of their employers, they are not 'taxable persons' and their activities are therefore outside the scope of VAT. If self-employed they would be 'taxable persons'.

Following this HMRC says: "If a trader is chargeable to both employment income and trading income, then only the gross monies earned from the work chargeable under trading income should be considered as being potentially subject to VAT and for which registration may be appropriate."

Exceptions to normal practice:

There is a 'what if' scenario, which is what interests most accountants with high earning clients with potential status problems and can occur when HMRC will not follow the same practice for direct tax and VAT purposes. It gives the treatment of 'office holders' i.e., directors, as one such example, where for direct tax purposes are not determinative of whether the activity is undertaken by way of business, whereas for VAT purposes it is.

HMRC says that it sometimes agrees "to tax all of a person’s income as chargeable under either employment income or trading income for administrative convenience, even though that person may receive income of both types. There will be instances where a trader argues for a different VAT status from their direct tax status and, in other instances, the personal tax status of a person may be unknown or undecided. However, on all these occasions you will need to examine the contracts that have been entered into, to decide which are contracts of service (employment) and which are contracts for services (self employment)."

National Minimum Wage

Pointing out that the only effect this entitlement is likely to have is in the reduction of financial risk in some cases and this is unlikely to be a factor that will tip the balance to a contract of service, the manual points out that:

"Where entitlement to a minimum wage exists because of the rights a worker has under the National Minimum Wage Act 1998, it does not mean that he/she necessarily works under a contract of employment. Employed workers and some self-employed workers are covered by the Act. However, the National Minimum Wage Act provides that qualifying workers are entitled under their contract to be paid at a rate equivalent to the national minimum wage. The right to be paid at a rate equivalent to the minimum wage becomes an implied term in the worker’s contract."

Editorial note

This guidance does not affect the VAT or NMW treatment of company income.