In the past HMRC would allow employment agencies to rely on the staff hire concession and only account for VAT on their administrative fees rather than on the fee plus the staff salary and other emoluments. This was cash flow efficient for the agency and made significant VAT savings for VAT exempt or non VAT registered businesses as it reduced the irrecoverable VAT cost to them as the staff emoluments were VAT free. HMRC's current view that such agencies should account for VAT on the total payments received including the staff emoluments has been challenged a number of times, most notably in the case of Reed which was successful. The First-Tier (Tax) Tribunal has issued a decision in the case of Adecco UK Limited and others that is significant for employment agency businesses and those using such businesses to supply staff. The facts of the case bears striking similarities to the facts in the case of Reed as it considers if the value of the supplies made by an employment business is that or the staff wage and administrative services, or simply the administrative services with the staff wages being paid as disbursement on the behalf of the employing business. The Tribunal chairman has found in favour of HMRC on the basis that the commercial and economic reality was that Adecco was supplying temporary members to its clients (as a principal) and that the temps could only work for the client via Adecco. The contracts defined Adecco as supplying the temp and it was responsible for providing sick cover and would be in breach of its obligations if the temp was not available. It 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 which was calculated by reference to the temp's hourly rate and a commission. The Tribunal chairman found that Adecco made a supply of the provision of the non-employed temps to the clients in return for the total fees paid by the clients. The chairman did however distinguish the decision from Reed on the basis that each business and case should be considered and decided based on its individual facts, so there is scope for this VAT issue to rumble on. Although there is the possibility of an appeal, this decision is disappointing for charities and other VAT exempt businesses that were hoping for a reduction in the amount that they would pay for temporary staff. Please do not hesitate to contact our helpline should you wish to discuss the implications of this decision in further detail.
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