You would think that in a mature, well-established staffing market like the U.K., the amount of VAT (value-added tax) charged for temporary staffing would be established and transparent. Unfortunately, however, this is far from the case following a court ruling earlier this year.
Before April 1, 2009, employment businesses involved in the provision of temporary staff were able to take advantage of a staff hire concession (SHC), which enabled them to only charge VAT on commissions (mark-up) rather than on the whole invoice (temporary gross pay + commission).
The SHC was particularly useful for employment businesses that supplied services to VAT-exempt clients such as banks, insurance companies, and those operating in the healthcare and charity sectors. VAT is normally a neutral tax for businesses as they are entitled to claim the taxed amounts back from the U.K. tax authority (HMRC). However, for clients operating in VAT exempt sectors, the SHC provided significant relief.
On April 1, 2009, the SHC was withdrawn and, since that time, employment businesses have generally applied VAT on the full invoiced amount. The concession was withdrawn largely because HMRC considered that the Conduct Regulations mean that employment bureaus acting as employment businesses must be seen as acting as principal for VAT purposes in respect of the services they supply.
But then, in March 2011, a court ruling in the case of Reed v HMRC confused the whole issue. . A first-tier tax tribunal held that an employment bureau should only charge VAT on the commission fee portion of its charge to clients, rather than on the entirety of its charge including salary, NIC, holiday pay, etc (i.e. the VAT status prior to 1 April 2009).
The court’s decision was primarily based on the issue of who controlled the temporary workers. In this particular case, it was concluded that the staffing company (Reed) did not at any time exercise control over the temporary workers; therefore, it could not be seen as a supplier of temporary workers as it ceded control of those workers to its client. The decision also took into account the terms of business with the clients and conditions of work for the temporary workers.
HMRC subsequently confirmed that it had decided not to appeal this decision and, in the absence of any further guidance, the U.K. staffing industry has been in a state of confusion since March. Did this mean that staffing companies would face demands from clients for VAT refunds running to thousands of pounds and going back several years? Did the decision set a precedent that meant they should, once again, charge VAT only on the commission part of their invoice?” What muddied the waters even further was that the court decision conflicted with an earlier tribunal judgment.
“Regrettably the VAT position is not cut and dry, but the latest decision obviously has implications across the employment agency sector,” said Hanna Dobson, VAT director at law firm Smith & Williamson. “Businesses which make mistakes could face fines and formal enquiries from the tax authorities, not to mention demands for repayments from clients”.
Agencies that get it wrong could potentially face an additional penalty of up to 30 percent of the VAT involved.
Tom Hadley, director of policy and professional services at the U.K. staffing association, the REC, urged staffing companies to be cautious. He said, "There has been some debate over the implications of the tribunal ruling. It has been argued that it does not necessarily set a precedent as this was only a first-tier Tribunal and the judgment was based on a very specific supply model. However, recruiters and their clients will clearly want to look into this further, especially if there is an opportunity to recover VAT payments."
Given that VAT refund claims can be submitted up to four years retrospectively, most businesses have been prepared to wait to see if HMRC make any public announcement to clarify the position. However, in recent weeks, some agencies reportedly are being encouraged or forced by their clients to charge on the margin only.
It is a relief, therefore, to hear that HMRC soon will issue a “Revenue & Customs Brief,” which should restore some sanity and clarity to the market. Furthermore, to deter those tempted to follow Reed’s example prematurely, HMRC has suggested that the Reed tribunal decision did not have a wider impact. As a spokesperson told Recruiter magazine on Aug. 17, “Reed is a judgment of the first-tier tribunal and as such is only binding on the parties to the appeal. HMRC therefore does not regard Reed as having any wider impact, particularly in relation to the VAT treatment that should apply to employment bureaus operating in the current market conditions and regulatory regime.”
While some might hope that the Revenue & Customs Brief will set the matter finally to rest, given the sums involved and the fact that, ultimately, large and powerful banks have the most to gain, don’t be too surprised if we see further legal challenges in the future.