Unravelling VAT Repayment Requests
In its 2010 VAT appeal case Reed Employment Limited successfully argued that, in relation to certain staffing supply arrangements, it was supplying introductory services as agent rather than making supplies of staff on a principal basis. As a consequence Reed had only to account for VAT on its margin rather than on the total amount charged to its client. HMRC subsequently announced in 2011 that it did not regard the decision as legally binding on future cases and that it would continue to enforce its policy of treating the entire staffing company charge as VATable. This case has been of growing interest to end users who are VAT exempt and for whom VAT is a cost. Since the decision some accountancy firms have actively encouraged clients who are unable to fully recover VAT to ask their staffing suppliers to make protective claims for VAT which, if the Reed case were to be followed in a subsequent legally binding case, would represent an overcharge.
Recent reports suggest that a large staffing company and possibly a group of charities are planning a Reed-based test case to challenge HMRC’s assertion that VAT is chargeable on the whole charge rather than just the margin. As far as we know no case has yet been lodged.
What is the legal position on this?
As a matter of law the 2010 Reed decision is not legally binding on other Tribunals and only has persuadable authority. In addition the decision was reliant on the facts of the case. There has been much publicity of this case which has given hope to some that it will apply to all agency and contract workers. However, the circumstances in the Reed judgment were quite limited and it is likely that only staffing companies whose models mirror that of Reed will be able to argue reliance on this decision. Those who supply workers engaged on an "umbrella" or "employed" basis are unlikely to be able to persuade HMRC that they fall within the terms of Reed. The position is similar for workers operating via personal service companies. Even if the facts are analogous HMRC is still not bound to follow the decision and our experience is that at present, even with analogous facts, HMRC is not agreeing to follow the decision.
If a test case is brought, the facts will be important because: in the same way as above, reliance will only be possible by those entities whose operations have facts analogous with the case.
If the supplies do follow the facts of Reed, what can be done?
Staffing companies with exempt end users and the end users themselves should consider both their historic and the future position. The end users have no right of redress to HMRC. Only the supplier can make the reclaim from HMRC. If the supplier recovers VAT it will then need to reissue previous invoices and forward the recovered VAT to the end user.
We are now seeing staffing companies receive VAT reclaim "demands" from end users. The first step on receipt of these demands is to ask how widely the end user thinks the case applies. The key here is to ensure that the end user's expectations are managed early in relation to umbrella and personal service company workers, in respect of whom a reclaim will be difficult and/or impracticable, if not impossible.
To the extent that the parties finally agree that it is commercially beneficial to seek to reclaim some VAT previously paid, a repayment claim can be made by the staffing company using the voluntary disclosure mechanism. Such claim can be made up to four years from the date of the original supply.
VAT on supplies made more than 4 years ago cannot be reclaimed which means that staffing companies that previously relied on the staff hire concession will face an unreclaimable gap developing from the date the SHC ended in April 2009. The staffing company should expect to enter into dialogue with HMRC about the claim the costs of such will need to be considered between the parties. On the face of it, it may seem unfair that staffing companies should have to bear the cost (but none of the benefit) of the reclaim.
The difficult and unfair thing about all of this is that generally the contracts require staffing companies to charge VAT to the extent applicable. If there is a successful test case, hirers may argue that if a staffing company has charged VAT but arguably should not have then it is in breach of contract and should repay anyway, even if it cannot reclaim beyond 4 years.
Our recommendations to staffing companies:
1. Assess which areas of your supply, if any, arguably fall within the facts if the Reed case
2. Check the VAT wording in your contracts – do you have a contractual obligation to charge VAT as applicable i.e. have you a breach of contract exposure?
3. Seek legal advice on making voluntary disclosures to HMRC to protect your position.