The decision of the First Tier Tribunal in a case involving Reed Employment Limited has caused a major debate over whether employment businesses should only be accounting for VAT on their margin. The Tribunal concluded that the economic reality was that Reed was supplying introductory services and not staff. As a consequence Reed’s supply for VAT purposes was its margin, i.e. the amount paid by a client less the amount paid by Reed to the temp worker.
VAT averse organisations, such as those in the financial services sector, are seeking to use this decision to reduce their VAT bills on temporary staff engaged through employment businesses. So should an employment business charge VAT only on its margin? As matters stand today, those that do may face a significant VAT bill and penalties as the decision in Reed does not create a legally binding precedent. Accounting for VAT on the margin will only be safe if HMRC revise their policy or if Reed is appealed and then upheld by the Upper Tribunal. Even then, the decision may be of limited benefit as the period in dispute in Reed was prior to the introduction of the Conduct of Employment Agencies and Employment Businesses Regulations 2003.
The Tribunal stated that the regulatory framework was not determinative it could affect the way in which business was conducted and so impact on the nature of the supply. Accordingly, changes resulting from those regulations may alter the analysis of what a business is seen to be supplying for VAT purposes. You should seek advise before altering your VAT charging as it is a most complex tax and circumstances will differ between agencies and how they operate.
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