Double VAT blow to City financiers

22 March 2017

David Wilson

As the City finance sector lobbies for post-Brexit tax breaks, a recent VAT tribunal confirms that it will have to carry on paying VAT, in full, on the engagement of temporary staff. This is not the only VAT blow hitting the industry.

In what will come as a major disappointment to the finance and insurance sector, and to other organisations unable to recover VAT charged by employment agencies, the Upper Tier Tax Tribunal recently confirmed that VAT must be charged on the full amount received by employment agencies, and not just on the commission.

Inspired by an earlier VAT tribunal in Reed Employment Ltd which determined that VAT should only be charged on the commission payable for introductory services, many businesses, particularly in the financial sector, encouraged their temporary staff providers to submit VAT reclaims in the hope that any refund would result in a windfall being passed on to them, and that their future VAT bills would be reduced.

Whether by design or circumstance, HMRC chose not to appeal Reed, meaning that the decision was not binding on any other employment agencies. Consequently, other employment agencies had to lodge their own appeals with the hope and anticipation that a similarly constituted Tax Tribunal would come to the same conclusion as that in Reed case.

Unfortunately for Adecco UK Ltd and the eight other employment agencies that joined it in its appeal, and their clients, the appeal was dismissed. As the Upper Tax Tribunal is a superior court, its decision is binding on other taxpayers. This means if other agencies, employers and temporary workers have the same contractual arrangements, VAT must be charged not only on the commission fee for the introduction of temporary workers, but also on the temporary worker’s remuneration, PAYE and NIC costs.

Paying VAT on the full costs of temporary workers is not the only VAT blow for the financial sector though; the recent development in changes to the VAT Flat-Rate Scheme (FRS) will also have an impact. 

Perhaps in an attempt to mitigate any adverse decision in the Adecco case to financial sector clients, the FRS was one of the tax arrangements used by employment businesses supplying staff. The arrangement appeared to exploit NIC employment allowances, whilst at the same time reducing the irrecoverable VAT costs to the finance and insurance sector.

As the FRS was dramatically altered in the Autumn Statement, it seems that there are now far fewer opportunities to mitigate VAT costs in the financial sector.

With increased emphasis on disguised remuneration packages, employment businesses and their clients in the financial sector look set to face some significant challenges for the foreseeable future.

For more information please get in touch with David Wilson, Ian Carpenter or your usual RSM contact.