On 9 October 2020, HMRC published new and extensive guidance covering the application of VAT across the recruitment sector.
In this summary, we cover key highlights from HMRC’s VAT Taxable Person Manual, which aims to address issues around the VAT status across the range of employment models currently adopted by the sector.
Why is this important?
From HMRC’s comprehensive procedure notes, it is clear they are focusing on more complex delivery models, including direct engagement and joint employment.
These are usually driven by the end client’s VAT status and the desire to mitigate VAT charged through to them.
- HMRC is now proactively engaging with the sector to improve tax compliance.
- The revised guidance summarises recent case law clarifications and applies this in a clear manner.
- The guidance also outlines common new delivery models.
- Advice is provided on the interacting Employment Agencies Act and the Conduct Regulations.
- ‘Specific circumstances’ addresses common areas where planning arrangements are in place or where there might be a perceived lack of compliance across the sector.
HMRC has now clarified the VAT treatment for a number of known staffing schemes present in the recruitment sector. In general, it aims to address instances where the end client cannot reclaim VAT costs. The key issues and recommendations across the range of employment models are summarised below.
Personal Service Companies (PSCs)
|What's the issue?||Do PSCs provide exempt services or taxable supplies of staff|
|Why is this important?
||This was a previous VAT mitigation argument targeted at those end clients who cannot reclaim VAT|
PSCs make a supply of staffing services. The health / welfare VAT exemption etc is not applicable to supplies made by PSCs. However, many PSCs can remain below the VAT registration threshold.
Direct Engagement Models (DEMs)
|What's the issue?||Do they legitimately mitigate VAT for end clients who cannot claim VAT?|
|Why is this important?
||Numerous models exist, with HMRC now making challenges to certain operators.|
HMRC accepts a free choice does exist when providing introductory services for a PSC or for the end client to employ the worker direct. Contracts should be very clear and made in full compliance with the Conduct Regulations.
Umbrellas and joint employment
|What's the issue?||Can a worker be employed by an umbrella and an employment agency?|
|Why is this important?||Disbursed payroll is outside the scope of VAT as nothing has been supplied. Often used with the nursing concession where the end client cannot reclaim VAT.|
|Conclusion||HMRC does not accept that an umbrella can employ a worker at the same time that the worker is employed by an end client. Therefore, logic dictates the same must also apply where a worker is also purported to be employed with an employment business. HMRC are likely to test the substance of any joint contracts to determine if they are a bona-fide employee of both the umbrella and the third party.|
The nursing concession
|What's the issue?||Who can actually apply the concession?|
|Why is this important?||Nurses are increasingly supplied by umbrellas, charities, medical practices etc.|
|Conclusion||The terms of the concession are very clear. Only an employment business (per the Employment Agencies Act) to the end client can qualify where all other conditions are met. It is highly advisable that assurance is sought from the end client on their own qualifying status.|
Direction and control tests of temporary workers
Whilst most people in the recruitment sector are familiar with the off-payroll working rules (commonly known as IR35), many aren’t aware that VAT is often closely aligned for determining control. This, in turn, determines the VAT status of supplies.
Over the last few years, there has been a flurry of VAT tribunals looking at direction and control across the sphere of VAT to determine if a supply of staff, or a supply of services (for example medical care), has occurred. Recent case law includes Mainpay versus HMRC [TC07690] which determined ‘operational control’ is the key indicator. For example, a worker may undertake their role autonomously, but the end client may dictate when, where and what work the person performs. If the end client has operational control, then the provider is likely to be regarded as providing personnel.
The Mainpay decision and other recent case law forms HMRC’s core strategy (ref: VATHLT2085) for determining if a Personal Service Company or an employment business is providing medical personnel within the scope of VAT. Alternatively, it also determines whether medical services are capable of falling within the medical VAT exemption.
Summary of HMRC updates
For the first time, HMRC has highlighted their technical understanding and stance across various staffing models adopted by the market.
We summarise below the topics explored with hyperlinks to HMRC’s updates.
Introduction - VTAXPER67100
This section covers basic principals and includes how VAT interacts with the Conduct Regulations.
- Defining supplies of staff.
- Interaction with employment legislation.
- The withdrawn staff hire concession.
These sections cover contracting choices and defines whether you are acting as an agent or as a principal plus the related VAT status.
Specific arrangements - VTAXPER67400
This section covers the business involved in supply staff in across the supply chain plus various staffing models often used to mitigate VAT for the end clients. It includes:
- Personal Service Companies;
- direct engagement models;
- umbrellas and joint employment;
- the nursing agency concession; and
- HGV drivers.