HMRC is strongly resisting the suggestion that the decision in the Reed VAT tribunal could herald a reduced VAT burden (and possible refunds) for businesses.

Where an employee is provided by one organisation to another in the UK for a payment, this is normally treated as a ‘supply of staff’. As such, VAT is chargeable at 20% on the value of the salary, national insurance and pension contributions for that employee, as well as any profit margin or administrative charge. In the past, businesses hiring temporary staff from an employment agency could make use of the staff hire concession, restricting VAT  to the agency’s mark up. This was abolished from 1 April 2009.

In the Reed case, the Tribunal decided that an agency cannot be making a supply of staff because it does not control the temp’s day-to-day work, instead it supplies an introductory service. Therefore, VAT should only have applied to Reed’s profit margin.

HMRC has subsequently issued a Business Brief stating its view that the Reed decision has limited scope as it deals with a claim from the 1990s. Further cases are likely to arise on this issue and employers who have incurred significant VAT costs in respect of temporary workers should contact the PKF VAT team for expert advice on their position.

Our thanks go to our strategic partner PKF(UK) LLP for this update.