A VAT tax briefing issued yesterday fails to resolve the issues of how staffing businesses can charge their clients VAT, according to a VAT partner at Deloitte.

In a briefing issued yesterday, HMRC restated its long held position on how staffing businesses are allowed to charge their clients VAT.

The briefing was prompted by a Tier One Tax Tribunal decision in March, which decided that Reed could charge VAT on a margin only basis when supplying temporary workers.

HMRC’s position is that only staffing business that are acting as an agent are allowed to charge clients VAT on a commission only basis.

However, when a staffing business is acting as a principal, by contracting with temporary workers (by way of a contract of service or a contract for services) it must charge VAT on the full amount charged to clients — this includes wages, PAYE and National Insurance Contributions (NIC).

Helen Devenney, a VAT partner at Deloitte, told Recruiterthat the contents of the briefing were “wholly expected” and did nothing to resolve the issues around the Reed tax tribunal.

“I don’t see any resolution of this other than through the courts,” she says. This is because the Reed decision was a Tier One Tribunal decision and therefore not legally binding, she explains.

Litigation could either be through the UK Courts or ultimately in the European Courts of Justice, and would take at least two years, she adds.

Devenney says that HMRC “seems to be saying that the Reed case relates to the period prior to the 2003 Conduct Regulations” and therefore is “not applicable” more widely.

She explains that most employment businesses have a contract of service or a contract for services with workers and therefore as they are acting as principals they must charge VAT on the full amount of their invoices. “That is the point that we feel has been untested,” adds Devenney.

“All the contracts suggest that they act as a principal but the case suggests that it’s the economic reality of the arrangement that determines how VAT should be charged that is probably more important,” she adds.

Devenney says the briefing will have little effect on the ground and that clients of recruitment agencies will continue to put pressure on their suppliers to charges VAT on the margin only, and to reclaim overpaid VAT from HMRC on their behalf.

Tom Hadley, Recruitment & Employment Confederation (REC) director of policy and professional services, told Recruiterthat he was aware of pressure from clients, although he says that this has lessened in recent weeks.  

Hadley agrees that litigation is the only answer to finally resolve the VAT issue. However, he says he would like to see any litigation to have the support of the client community, who will be “the real winners” if the Reed decision were to be applied more widely.