The VAT treatment of a supply of temporary workers by an employment agency business now appears to be resolved following the recent Court of Appeal decision in Adecco.
This is an important decision, not only for employment agency businesses, but because it may have wider implications for businesses that operate an agent/principal model.
The Court of Appeal decision in Adecco UK v HMRC
Robert Facer – VAT Director
The Court of Appeal confirmed that the supply of temporary staff is liable to the standard rate of VAT on the full amount received from the client, and not just any commission element retained by the employment agency.
The Court of Appeal decision has removed the doubt that existed due to a 2011 judgement in the First Tier Tribunal case of Reed Employment. In the Reed case, the Tribunal reached the conclusion that VAT was only due on the commission, as the service being supplied by the employment agency was merely of introductory services.
The Court of Appeal in Adecco has authoratively stated that Reed was decided wrongly. Although the Reed case is not binding on other Courts, as it is a First Tier decision, the comments in Adecco appear to block any further attempts for litigants to rely on the Reed case.
Why is this important?
Employment businesses will have to ensure that they charge VAT on the correct value of the supply made to clients. This could affect employment businesses more drastically where their supplies of temporary staff are to customers in certain sectors, such as healthcare, financial services and charities. For those sectors, the additional VAT cost will bite. Employment agencies operating in these sectors may see their clients turning to contract workers as a more VAT efficient solution than temps.
There are also wider implications to this decision, as it is relevant not only to employment agencies, but potentially to any agent/principal relationship.
The precise nature of the contracts will be key in determining whether a true agency arrangement exists, and whether VAT is due only on the commission element or the full value of the payments handled by the ‘agent’. Adecco ultimately failed due to the contractual position.
What does this mean for agency businesses?
We recommend that agency businesses, particularly employment agency businesses, carefully consider the implications of the Adecco case and review their position to ensure it is compliant for VAT purposes.
For advice on how the Adecco decision may affect your business or on any other VAT matters, please speak to your usual Menzies contact or our VAT Director, Robert Facer, on 020 7465 1975 or at email@example.com.