Supply and demand

HMRC's BELATED response to a case with Reed Employment has only served to muddy the waters regarding the VAT implication for businesses that supply or use temporary workers. Martin Sharratt provides an update.

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Accountancy Age recently reported on the belated HM Revenue & Customs response to the decision of the First Tier Tax Tribunal in the case of Reed Employment.

The tribunal decision, released in late March, held that an employment business supplying temporary workers should be seen as providing an introductory service, rather than a "supply of staff": accordingly it should charge VAT only on the commission or fee that it kept for itself and not, as HMRC had argued, on the full amount charged to the client which included the wages paid to the temp, plus tax and national insurance (NIC).

HMRC decided not to appeal the decision, but now, after some five months of lively debate, they have issued a business brief which effectively ignores everything the tribunal said - HMRC's view being the decision only applied to the specific facts of that case and "does not have any wider impact".

A decision of the first tier is not automatically binding on other businesses but the case may still have a bearing on other companies, so this may not be the end of the matter. In the months since the tribunal's decision was released it has become very clear that a great many employment businesses supply temporary workers on terms and conditions which are virtually identical to those considered by the tribunal.

HMRC's argument was based on the contractual form, which was dictated by the Employment Act and Conduct Regulations and meant that, for the purposes of that legislation, Reed could not be seen as acting as an agent. The tribunal held this did not determine how the arrangements should be treated for VAT. In particular, a key fact for the tribunal was that Reed did not control the temporary workers, who were free to accept or decline the work offered to them, and it was held therefore Reed was incapable of making a supply of staff in such circumstances.

This struck a chord with many employment businesses and their clients, particularly where the clients operated in the healthcare and finance sectors, or areas where companies could recover VAT. Agencies came under pressure to apply the findings of the tribunal and found themselves at risk of losing business to competitors who had taken the plunge and started to charge VAT only on their commission.

Meanwhile, a policy statement by the Recruitment and Employment Confederationin August, counselled its members to proceed with caution, advising that firms who charged VAT only on their commission "would be taking a substantial risk".

So what does this all mean for the huge number of businesses in a similar situation as Reed? It now seems that the position will remain unclear until another case comes forward and - if that case then goes to appeal = the final outcome could be years away. In the meantime, the amounts of tax at stake will quickly run into millions of pounds for the larger employment business, leaving them with worrying levels of exposure if they apply VAT only to their commission.

Any business who supplies or uses temporary workers will need to take professional advice and to keep a close watch on developments; but more importantly, suppliers and their clients will need to discuss how to treat these charges now and in the future. If VAT is charged on the full amount, the clients will want to be sure the employment business lodges a protective claim with HMRC; if VAT is to be charged on the commission only, the parties must agree on who bears the cost if the eventual outcomes goes in favour of HMRC.

Martin Sharratt is a director and head of VAT at Smith & Williamson