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May

VAT: Temp Workers: A New Dawn? PUBLISHED IN VAT

One of the most dispiriting of costs created by VAT is the imposition of VAT on the salary element of charges made by employment businesses for temp staff. This particularly harms finance businesses and charities which generally cannot reclaim VAT and which rely for good operational reasons on using temps.

 

The VAT position did not always present such problems. Up until April 2009 HMRC accepted that certain types of contract for temps gave rise to VAT only being levied on the commission element. But the introduction of The Conduct of Employment Agencies and Employment Businesses Regulations 2003 and, after a considerable delay, the decision by HMRC to let the VAT analysis follow suit, caused VAT to be added to the entire cost. At that time I attended various meetings particularly concerning the impact on charities, where we considered arguments against HMRC on the basis, perhaps, that the new regulations did not change the VAT analysis if the substance of the transaction, or the contractual framework, pointed in a different direction. But it seemed that this was not really credible. The regulations went too far, it was thought, to take that view.
 
But now, a new Tax Tribunal decision appears to challenge this idea, so the ramifications are potentially vast. Is it all that it seems, and what has caused it?
 
The case, Reed Employment Limited, seems to relate only to transactions that pre-dated that policy change. For that reason, HMRC must have thought that it could not threaten the current situation. If so, they have received a nasty surprise. 
 
They challenged a claim of ostensibly overpaid VAT on the part of Reed, because they thought that the contract used by Reed had never delivered the VAT-free outcome. I assume also that the apparent concessionary treatment that was allowed at that time was denied Reed because it had not chosen to apply the concession at the time it was available. Quite why these circumstances arose is a bit puzzling. Had Reed wished to arrange matters so VAT was only charged on the commission element, it would not have been too difficult for them to do that. 
 
The tribunal disagreed with HMRC, and decided that only the commission element had been subject to VAT. That was bad enough for HMRC, but worse was to come from the detailed analysis which the tribunal applied.
 
It considered the regulatory framework, the detailed provisions of the contracts between the parties, and the physical realities of the supply delivery. Put crudely, the tribunal concluded that both the contractual provisions and the regulatory position were of little assistance. Stopping there, this surprising view threatens the policy which now applies, and which depends heavily on the regulatory position. The reasoning appears to be that the tribunal viewed the regulations and the contract as effectively controlling only the legal situation, whereas the VAT interpretation had to reflect the practical arrangements. Whilst the contract, and the framework in which it could be construed, was the starting point, the tribunal felt that the practical arrangements did not accord with them sufficiently to apply the contract directly.
 
Why? What was so different or inconsistent? This is where the plot thickens, so to speak. It is difficult to understand what problem the tribunal felt it had encountered. It appears to have applied tests which relate to whether a worker is an employee of a company, even though those tests are probably irrelevant. It is not necessary for a person to be an employee in order to be transacting with an employment business. The tribunal does not appear to say that the temp is an employee of the final user. There seems little indication that the temp contracted direct with the final user to provide services. There is no mention of the final user being solely responsible to the temp for paying them, nor of there being no such obligation placed on Reed. One would have thought that that kind of legal obligation was central to an analysis of whether the employment business stands as a principal in the chain of transactions, but I cannot find a reference to it.
 
So, was the decision even correct? Perhaps, but also probably not. One can only believe that HMRC will appeal it, or at the least attempt to play down the more remarkable aspects that could arguably destabilise their current policy.
 
But is that policy a good one? Well, no. It would be far better to revisit the 2003 Regulations, which stifle temp structures for workers, thus decreasing choice in modes both of working and hiring. That is something we might expect the current government to consider. Meanwhile, this decision causes at least a flurry of hope for tax payers, and concern for HMRC policy makers. It will be interesting to see where this takes us.
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