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HMRC makes a stand in reed vat case

HMRC makes a stand in reed vat case

HM Revenue & Customs (HMRC) has just released its reaction to the recent Reed Employment VAT Tribunal decision, which found that Reed only had to account for VAT on the commission element of charges for the use of temporary staff. As expected, HMRC’s view is that the decision is limited to the circumstances of Reed. Other recruitment businesses should not, according to HMRC, apply the findings of the Tribunal to their business. 

David Bennett, a VAT partner at Saffery Champness, comments:

“We do not believe that this is necessarily correct, but there is real uncertainty about the correct approach. The Reed decision, whilst focusing on the position pre-1996, can certainly be read in such a way that it has current application as well. “

“HMRC emphasise the importance of determining if the employment business is acting as agent or principal. An agent should account for VAT only on its fee or commission whilst a principal must pay VAT on the full amount paid by the client. The difference, therefore, is whether VAT need be paid on the salary element re-charged to the client.

“The relationships between worker, employment business and client are crucial in deciding which applies.  However, in our opinion, there are aspects of the Reed decision, notably the importance of the “economic reality” of the arrangements, which suggest that this is not the correct approach and that VAT perhaps need not be paid on the salary element even if a contractual analysis suggests that the employment business is a principal.”  

Richard Collis, partner and head of Saffery Champness’ Professional and Consultancy Services Group, comments:

“Many recruitment businesses are coming under pressure from clients to interpret the Reed decision in a favourable way and not charge VAT on the salary element. The situation is very uncertain however, and HMRC’s Brief does not help at all, in our opinion, to clarify this area.

“Recruitment businesses are caught between the commercial pressure exerted by clients and a clear expectation on the part of HMRC that in many circumstances they need to pay VAT.  Given these pressures, it must be likely that further litigation will follow, but such a process will not resolve the matter quickly. In the meantime, employment businesses must exercise caution, and should certainly take advice on their position, before agreeing to account for VAT only on the fee or commission element.”

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