For many organisations, the question of whether VAT is owed on the supply of temporary workers can be a confusing one. HM Revenue & Customs’ (HMRC’s) position on this matter has shifted a number of times in recent years, leading to a lack of clarity among many affected by these laws.

However, a tribunal ruling made on a case brought forward by the recruitment agency Adecco has indicated that HMRC will be taking a more hardline approach to this matter in future. For charities and other organisations affected by this, it is essential to ensure that they fully understand the implications of this ruling.

A change of approach

In the past, HMRC would allow employment agencies to rely on a staff hire concession, meaning they only accounted for VAT on their administrative fees, rather than on the fee plus the staff salary and other emoluments. This was cashflow-efficient for agencies, and reduced irrecoverable VAT costs for VAT-exempt or non-VAT-registered businesses such as charities, by making the staff emoluments VAT-free.

However, HMRC's current view is that agencies now need to account for VAT on the total payments received, including the staff emoluments. This approach is much more costly and burdensome, and as such, it has been challenged a number of times.

Most notably, the employment agency Reed made a successful challenge to this rule via the First-Tier Tribunal in 2011, making the argument that the VAT-taxable value of the supplies made by an employment business should only apply to the commission charged to clients for the introduction of the temps, whereas the staff’s wages are paid as disbursement on the behalf of the employing business.

This ruling was accepted and was not appealed by HMRC; however, in cases since then, HMRC has been more successful in enforcing the original intention of its regulations.

Overturning the Reed precedent

In 2013, HMRC rejected a number of claims made by Adecco UK to recover VAT payments for remuneration paid to non-employed temps over a period from 2007 to 2008. Adecco decided to take the matter up with the First-Tier Tribunal, as Reed had done previously; however, the conclusion to this case was very different.

The tribunal chairman found in favour of HMRC, determining that the commercial and economic reality was that Adecco was supplying temporary members to its clients as a principal, and that these temps were only working for the client via Adecco. The contracts defined Adecco as supplying the temps, noting that the agency was responsible for providing sickness cover, and would be in breach of its obligations if the temp was not available.

Moreover, Adecco had the right to suspend an assignment and termination rights in the contracts with both the temps and the clients, and was paid a fee calculated in accordance with the temp’s hourly rate and a commission.

As such, the tribunal chairman found that Adecco had made a supply of the provision of the non-employed temps, in return for the total fees paid by the clients, and was therefore liable to pay VAT. Adecco subsequently escalated this case to the Upper Tribunal and the Court of Appeal, but both bodies upheld the original decision, bringing this litigation to an end in 2018.

The implication for businesses

Clearly, this decision is significant for employment agency businesses and those using such businesses to supply staff. Although the First-Tier Tribunal chairman did distinguish this decision from the Reed case on the basis that each situation must be considered on its merits, it sends a clear indication that this is a matter on which HMRC is prepared to act.

This will be disappointing for charities and other VAT-exempt businesses that were hoping for a reduction in the amount that they would pay for temporary staff. Nevertheless, it is vital to stay compliant with HMRC’s most current guidance on such matters, which is why it is essential for organisations in this position to make sure they have followed all the rules.

If you wish to discuss the implications of this case in further detail or need any other advice on how VAT applies when taking on temporary agency staff, call our free helpline on 0161 477 6600. Our expert advisers will be able to clarify your responsibilities and make sure you are acting within your rights.