How to cut your VAT bills and have some very satisfied clients

If you are an intermediary (employment agency or umbrella company) supplying clients who can’t get their VAT back, how about not charging it in the first place?  These clients might be public sector bodies (central and local government and the NHS), any other healthcare providers, charities, schools, banks and insurance companies.

Until 2009 HMRC operated what was known as the Staff Hire Concession, whereby under certain conditions intermediaries only had to charge VAT on their mark-up.  This was withdrawn as it was thought to be contrary to European law (or so they said).

The method for agencies

That was until ReedEmployment took them to the tribunal. Reed have form here – they won one of the major VAT cases in the 1990’s, which was how the Staff Hire Concession came about.  This time HMRC were after £143 million, and they lost again: when one sees the amounts of money involved it is slightly surprising
that they have decided not to appeal.  They say (somewhat disingenuously in our view) that the judgment only applies to the facts of the case and has no wider implications – see http://www.hmrc.gov.uk/briefs/vat/brief3211.htm.

Reed’s defence was that there were in fact two supplies: one by Reed of introductory services and the other by the temps themselves of whatever work they did.  VAT would only be payable on the ‘introductory services’ (i.e. Reed’s mark-up), because the temps themselves would be below the VAT threshold.

For a copy of the judgment go to http://www.bailii.org/uk/cases/UKFTT/TC/2011/TC01069.html.

This is a model that is likely to interest companies whose clients cannot get their VAT back.  However, great care is needed in drawing up the contracts, as HMRC are known to scrutinise things carefully when staffing companies are concerned, and we recommend that specialist advice be taken.

The method for umbrella companies

The Reed model, above, is unlikely to work for umbrella companies who have contracts of employment with their staff.  However, there is another way of doing this which avoids VAT on the entire supply.  This involves making an exempt supply of a service, rather than a standard-rated supply of staff.  The distinction is a subtle one and hinges around who takes responsibility if things go wrong.  Again we recommend that specialist advice be taken.

For further information and specialist advice on either of these possibilities please contact David Kirk on -845 519 5041, or e-mail him at dk@david-kirk.info.

On November 16, 2011, posted in: Articles by