HMRC has set out their stance on this case in Business Brief 32.11 which is available from http://www.hmrc.gov.uk/briefs/vat/brief3211.htm. It is interesting to note that HMRC appear to have deliberately not appealed this decision as under the new structure, decisions of the First Tier Tribunal are only binding on the parties to that case and do not create a precedent for other future cases.

The outcome of the case was that the tribunal held that in providing temporary staff to its clients Reed was supplying introductory services rather than making supplies of staff. Accordingly the company was only liable to account for VAT on the commission element of its charge and not on the overall amount paid by the client which included the wages paid to the temp and associated National Insurance contributions.

This differed to earlier case law where the tribunal had decided that the employment agency was acting as principal in the transaction and VAT was due on the whole of the consideration received.

Overall HMRC remain convinced that this earlier judgment was correct and that the later case has not altered the position here. They will only accept that a bureau is not making a supply as principal if they merely introduce the worker and there is a direct contractual arrangement between the employer and the employee and the bureau does not actually pay or arrange to pay the workers.

So where does this leave employment bureaus? Certainly for periods prior to 2009 there are grounds for making repayment claims however any funds received will need to be repaid to the original customers to avoid any unjust enrichment claims. Agencies will need to carefully consider whether a claim is appropriate whilst accepting that they are open to claims from customers for VAT overpaid.

It should be noted that not all customers will have been able to reclaim any VAT charged by an agency in the first place if for example they only make exempt supplies such as  Banks, Insurance Companies, Financial Services Companies and those that operate in the Care Sector so for them any reduction in VAT is a real saving.

For transactions since 2009 Agencies need to review the contractual arrangements and if these are such that they were not acting as principal then again they should consider making a claim. Again this will be subject to the unjust enrichment  rules but agencies customers will undoubtedly be very happy to receive a VAT refund particularly if they were unable to recover the VAT in full in the first place.

Going forward agencies should review their contractual arrangements to ensure that VAT is only chargeable on the full value of the supply where they are truly acting as principal in the supply of staff and consider amending their agreements if possible to reduce the burden of VAT on both themselves and their Customers.

Robert Twydle
VAT Partner
Hillier Hopkins LLP
DD –  01923 809410
T – 01923 232938
www.hillierhopkins.co.uk  robert.twydle@hhllp.co.uk