UK: VAT Focus - September 2011

Last Updated: 29 September 2011
Article by Smith & Williamson

Reed case update

In the case of Reed Employment Ltd, released in late March, the First Tier Tribunal (FTT) held that an employment business supplying temporary workers should be seen as providing an introductory service, rather than a 'supply of staff '.

Accordingly the agency should charge VAT only on the commission or fee that it kept for itself and not, as HMRC had argued, on the full amount charged to the client (which included the wages paid to the temp, plus tax and national insurance contributions). HMRC decided not to appeal the decision, but now, after some five months of debate, it has issued a rather belated business brief which effectively ignores everything the FTT had said. HMRC takes the view that the Reed decision applies only to the specific facts of that case and "does not have any wider impact".

A decision of the FTT is not automatically binding on other parties. However, that does not entitle HMRC to ignore its findings and this is not likely to be the end of the matter. In the months since the FTT's decision was released it has become clear that many employment businesses supply temporary workers on terms and conditions which are virtually identical to those considered in the Reed case. HMRC's argument was based on the contractual form, which was dictated by the Employment Act and Conduct Regulations and meant that, for the purposes of employment law, Reed could not be seen as acting as an agent.

The FTT held, however, that this did not determine how the arrangements should be treated for VAT. In particular, a key fact for the FTT was that Reed did not control the temporary workers, who were free to accept or decline the work offered to them, and it was held therefore that Reed was incapable of making a supply of staff in such circumstances. This struck a chord with many employment businesses and their clients, particularly where the clients operated in sectors such as healthcare or finance, where they could not recover the VAT.

Agencies came under pressure to apply the findings of the FTT and found themselves at risk of losing business to competitors who had taken the plunge and started to charge VAT only on their commission. Meanwhile, a policy statement by the Recruitment and Employment Confederation in August advised its members to proceed with caution, warning that firms who charged VAT only on their commission "would be taking a substantial risk".

What next?

In our view, the FTT made a number of telling points, which cast serious doubts on HMRC's ability to maintain its current policy. However, it seems that the position will remain unclear until another case comes forward, and the final outcome could be years away. In the meantime, the amounts of VAT at stake will quickly run into millions of pounds for the larger employment businesses, leaving them with worrying levels of exposure if they apply VAT only to their commission.

Any business which supplies or uses temporary workers will need to take professional advice and to keep a close watch on developments; but more importantly, suppliers and their clients will need to discuss how to treat these charges now and in the future. If VAT is charged on the full amount, the clients will want to be sure that the employment business lodges a protective claim with HMRC; if VAT is to be charged on the commission only, the parties must agree on who bears the cost if the eventual outcome goes in favour of HMRC.

Please speak to the VAT team or your usual Smith & Williamson contact for further information if the position on temporary workers affects your business.

VAT treatment of travel agents fees: the Secret Hotels 2 Ltd case

The 'agent or principal?' question has been further considered in a recent case at the Upper Tribunal.

The company involved was part of a group of hotel and travel booking companies that included lastminute.com. It had appealed against a decision of HMRC that the company was a principal in supplying hotel accommodation to holidaymakers on which it should account for VAT under the Tour Operators Margin Scheme. The company argued that it was an agent for the hotels and that the hotels were the principals in supplying accommodation to holidaymakers.

When the case was heard at the FTT they concluded that, although the agreements between the company and the hotels stated that the company acted as the hotels' agent, the economic reality was that the hotels supplied accommodation to the company and it made onward supplies of hotel accommodation, as principal, to holidaymakers and should pay VAT on those supplies.

The Upper Tribunal considered it more appropriate to analyse the contractual position established by the agreements between the parties, in particular the agreements between holidaymakers and the company. Having concluded that these agreements were not a sham, the Upper Tribunal decided that the company was indeed an agent, not a principal, as this is what the agreements represented. The Upper Tribunal reversed the FTT's decision and commented that the FTT had put too much emphasis on the earlier decision in Reed (see previous item).

What next?

This case further demonstrates the difficulties in determining whether a business is acting as an agent or a principal for VAT purposes – a distinction which can involve large sums of tax.

Exemption for individual voluntary arrangements

Following an unsuccessful appeal at Tribunal, HMRC has issued a Revenue & Customs Brief (27/11) confirming that the services of insolvency practitioners (IPs) relating to individual voluntary arrangements (IVAs) are exempt from VAT. Although the Tribunal only considered consumer IVAs, HMRC believes that the decision applies to all IVAs, but not to company or partnership voluntary arrangements.

In reaching its decision, the Tribunal considered the nature of the services IPs carry out for IVAs. These are nominee services, which involve the preparation of a proposal to be agreed between the debtor and the creditors, and supervisory services, involving the supervision and monitoring of the agreement, including taking regular payments from the debtor and paying the creditors in accordance with the agreement. The Tribunal found that the core elements of the supplies were negotiations of debts or transactions concerning payments, which fell within the exemption provisions.

What next?

IPs should stop charging VAT on invoices issued in respect of IVA appointments. For VAT charged on past supplies, claims may be made for invoices issued in periods ending within the last four years. As these supplies are exempt from VAT this will impact on the IP's entitlement to recover input VAT attributable to these supplies.

Therefore, any claims must take into account the input VAT that should have been blocked and HMRC will refund the net amount. IPs can choose not to make adjustments for the past periods, but office-holders will need to consider their obligations and creditors' expectations, especially for cases which are still open. Although HMRC does not consider that this decision extends to corporate or partnership voluntary arrangements, it would be no surprise if this apparent inconsistency of treatment is subject to challenge in due course.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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