VAT
VAT and IR35
See our IR35 legal guide for details on how to calculate the income tax and national insurance of a limited company contractor working through their own company and charging VAT.
Do I have to charge VAT on my fees?
General principles
Value Added Tax (VAT) applies to most business transactions involving the supply of goods or services. Once turnover reaches a certain level a business must register with HMRC and account for VAT i.e. pay VAT on its purchases (input tax) and charge VAT on its supplies (output tax). If a VAT registered business receives more output tax from its sales than it pays in input tax on its purchases then it must pay the difference to HMRC. If the opposite is the case then HMRC will refund any overpaid VAT. VAT is chargeable at the standard rate (currently 20%), zero rated or exempt.
VAT notices
HMRC publishes guidance on how and when to charge VAT through various business briefs and VAT Notices. Relevant notices for the recruitment industry are:
VAT Notice 700/34 states that recruitment services are VATable as follows:
- Where you act as an “agent” who introduces and places candidates who will be engaged directly by the client. Here you should charge VAT at the standard rate on your introduction fee.
- Where you act as a “principal” i.e. as an employment business and supply temporary workers to work for a client. You may engage the temporary workers directly (i.e. they are on your payroll) or you may engage them via an intermediary such as an umbrella company, a commercial contractor (e.g. an intermediary in the construction sector) or a personal services company. However you engage the temporary worker, unless you can apply a concession or exemption (see below you should charge VAT at the standard rate on the whole cost of supplying that worker to the client. This includes your margin plus the gross amount paid to the worker, together with employers’ national insurance contributions, holiday pay, pensions contributions (if applicable) or the gross amount paid to the intermediary.
Do I have to charge VAT on my fees? (Case law)
Exemptions and concessions
There are some limited circumstances in which an employment business may be able to take advantage of an exemption or concession when supplying temporary workers into certain sectors. These concessions and exemptions mean that VAT is either not chargeable or is chargeable only on the margin. Further details are available here:
Recruiters must be sure than an exemption or concession applies to their service before they agree not to charge any client VAT on the whole cost of their supply.
Case law
In July 2018 the Court of Appeal upheld the Upper Tribunal’s decision from November 2015 that Adecco must charge VAT on the whole cost of its supply of temporary workers. Adecco had initially sought a refund of approx. £11 million VAT as a result of the 2011 Reed decision. In March 2011, the VAT Tribunal held that Reed was liable to account for VAT only on the commission element of its charges and not on the overall amount paid by the client (which included the wages paid to the temporary worker and associated national insurance contributions). The Tribunal held that in providing temporary staff to its clients, Reed was supplying introductory services rather than making supplies of staff. Interestingly, the Tribunal held that in providing these introductory services, Reed was acting as a principal (rather than as an agent) although it also stated that neither the principal/agency analysis set out above, nor the regulatory framework which supports it (i.e. the Conduct Regulations) determine the nature of the supply for VAT purposes. This was at odds with HMRC's view and so this potentially undermines the entire principal/agent basis for charging VAT (or not). HMRC have repeatedly said since then that the judgment does not set a precedent. Adecco then sought a refund of VAT based on the same principles. This was rejected by HMRC, the VAT Tribunal, then the Upper Tribunal and now the Court of Appeal. In its judgment the Court of Appeal criticised the Reed decision and said it was wrongly decided. However that does not overturn the Reed decision. It is quite unsatisfactory to have contrasting decision, based essentially on the same facts. We understand that a number of other recruiters had cases standing behind Adecco and so we await to see what they will do.
In the meantime, if a recruitment business is asked by a client not to charge VAT on the whole cost of the supply the business will have to take detailed expert advice to establish any grounds for agreeing to such a request.
What is the difference between a concession, an exemption and zero rating?
There are some limited circumstances in which an employment business may be able to take advantage of an exemption or concession when supplying temporary workers into certain sectors. These concessions and exemptions mean that VAT is either not chargeable at all or is chargeable only on the margin.
Concessions
HMRC occasionally grants an extra-statutory concession to reduce the VAT liability for taxpayers but which reduction they would not be entitled to under the strict letter of the law. Most concessions are made to deal with anomalies under VAT legislation and to deal with cases of hardship at the margins of the VAT code where a statutory remedy would be difficult to devise. Two key concessions for the recruitment industry were the Staff Hire Concession and the Business Brief 10/4 concession, both of which were withdrawn on 1 April 2009.
1. The Staff Hire Concession was introduced in 1997 as a temporary measure in response to a previous case also involving Reed and a tribunal decision which HMRC considered led to a market distortion. It only applied where the temporary workers were employees of the employment business i.e. the workers were on contracts of employment rather than the usual contract for services. The concession expressly allowed the employing employment business to second its staff to the client provided the client agreed to be responsible for paying the remuneration of such staff for the period of secondment, VAT was due only on the employment business’ margin. This concession was withdrawn because it was held to be incompatible with EC law.
2. The Business Brief 10/04 Concession was introduced in 2004, also as a temporary measure. It could be used by employment businesses who supplied temporary workers engaged on contracts for services, to clients who were unable to reclaim VAT such as in the financial services sector. This concession allowed employment businesses to charge VAT on their margin only rather than on the full cost of the supply.
Since the withdrawal of both of these concessions, all employment businesses, irrespective of the sectors they supply into, must charge full VAT on the total cost of all supplies of staff unless they are supplying exempt services or can apply another relevant concession.
Exemptions
Some goods and services are exempt from VAT i.e. VAT is not charged at all. Items that are exempt from VAT include the following:
• insurance, finance and credit
• education and training
• fund raising events by charities
• subscriptions to membership organisations.
There is a VAT exemption for the supply of certain healthcare staff and another for the provision of welfare services. For further details please see below 'VAT and the Healthcare Sector'.
Zero rated supplies
These are VATable supplies but the VAT rate is zero per cent.
I supply temps to banks and charities and have been asked to charge VAT on my margin only? Is this permitted and if so do I have to operate in a different way?
Recruitment businesses provide the following services that are chargeable to VAT:
- acting as an employment agency – i.e. introducing work-seekers to be employed directly by the client;
- acting as an employment business i.e. supplying work-seekers to work for and on behalf of your client;
- possibly providing related services such as training or CV writing.
Regardless of the identity or nature of your client’s business, unless you can apply a relevant concession or exemption, you should charge VAT on your recruitment services once your turnover reaches a certain level and you are required to register for VAT (from Augustl 2018, the threshold is £85,000).
VAT and the Healthcare Sector
The VAT policy in relation to supplies of healthcare staff by employment businesses is set out in the VAT Notice 701/57 (Health professionals and pharmaceutical products). This is a summary only and we recommend that you/ your VAT and legal advisors read the complete notice.
Section 6 of the notice explains the VAT position when supplying health professionals. The notice distinguishes the supply of medical services by registered health professionals (which are VAT exempt where certain conditions are met) from the supply of those staff by recruitment businesses (which are a VATable supply). Importantly, therapists (such as acupuncturists, physiotherapists and hypnotherapists) who do not have statutory registers cannot currently exempt their services from VAT.
Paragraph 6.3 of VAT Notice 701/57 confirms that a supply of staff is a standard rated supply for VAT purposes and this includes the supply of care staff, doctors and other registered health professionals by employment businesses. Paragraph 6.3 is copied here for ease of reference:
6.3 Supplies of registered health professionals * (other than nurses) by employment businesses acting as a principal
The Employment Agencies Act 1973 defines an 'employment business' as a 'business (whether or not carried on with a view to profit and whether or not carried on in conjunction with any other business) of supplying persons in the employment of the person carrying on the business, to act for, and under the control of, other persons in any capacity.'
Staff supplied by an employment business may be either employees of that business, or self-employed and engaged by that business. In both cases the workers’ services are provided to the employment business, which in turn makes a supply of that worker to the client. If the worker comes under the direction and control of the client, this is a supply of staff. The employment business in these circumstances is acting as the 'principal'.
When an employment business supplies registered health professionals (other than staff subject to the nursing agencies’ concession below) as a principal to a third party, where the health professional is working under the control and guidance of the third party, it is making a taxable supply of staff to that third party – not an exempt supply of healthcare. It is the third party which is responsible for providing healthcare to the final patient, rather than the business supplying the staff which has no such responsibility.
A taxable supply of staff is made even where the employment business is responsible for ensuring that the workers it provides are properly trained and qualified when they work under the control of the third party.
However, if the employment business maintains the direction and control of its health professional staff to make a supply of medical care directly to a final consumer, then the employment business is providing medical services rather than merely a supply of staff. In these circumstances, the business is making an exempt supply of health services (provided, of course, the services meet the conditions for exemption under section 2.3).
* Paragraph 2.1 of VAT Notice 701/57 sets out who is a registered “health professional”. This includes individuals who are enrolled on the appropriate statutory register:
- medical practitioners;
- optometrists and dispensing opticians;
- professionals registered under the Health Professions Order 2001. These professionals are: arts therapists, biomedical scientists, chiropodists/podiatrists, clinical scientists, dieticians, hearing aid dispensers, occupational therapists, operating department practitioners, orthoptists, paramedics, physiotherapists, practitioner psychologists, prosthetists and orthotists, radiographers, and speech and language therapists, but will also include any medical care professionals added to the Order at a future date;
- osteopaths;
- chiropractors;
- nurses, midwives and health visitors;
- dentists, dental hygienists, dental therapists, dental nurses, clinical dental technicians, dental technicians; orthodontic therapists and;
- pharmacists.
Self-employed locum GPs: Paragraph 6.4 of the VAT Notice 701/57 confirms that VAT is chargeable at the standard rate when an employment business supplies a self-employed locum GP to a client. There is no definition of 'self-employed locum'.
Health and care services which are exempt from VAT:
1. The nursing agencies’ concession:
The following text has been taken from paragraph 6.5 of VAT Notice 701/57:
Nursing agencies (or employment businesses that provide nurses and midwives, as well as other health professionals) may exempt the supply of nursing staff and nursing auxiliaries supplied as a principal to a third party, if the supply is of:
- a person registered in the register of qualified nurses and midwives maintained under article 5 of the Nursing and Midwifery Order 2001 providing medical care to the final patient;
- an unregistered nursing auxiliary who is 'directly supervised' by one of the above, or
- an unregistered nursing auxiliary, whose services are supplied to a hospital (NHS or private), hospice, care home with nursing under item 4 of Group 7, Schedule 9 VAT Act 1994 and form part of the care made to the patient.
A nursing auxiliary (also known as a healthcare assistant) is an individual who is not enrolled on any register of medical or health professionals but whose duties must include the provision of medical, as well as personal, care to patients.
The institution to which staff are supplied may be operated by a local authority, NHS body, charity or other organisation operating in the public or private sector.
To qualify for the concession, the employment business must be registered with one of the following organisations:
- Scottish Commission for the Regulation of Care,
- Care Standards Inspectorate for Wales,
- Northern Ireland Health and Personal Social Services Regulation and Improvement Authority, or
- Care Quality Commission (for supplies before 1 October 2010).
In England, with effect from 1 October 2010 (as a result of changes announced in the Health and Social Care Act 2008), the legal requirement for nursing agencies to be registered under the Care Quality Commission ceased and responsibility for quality standards has passed to those organisations that provide the regulated activity. Therefore for supplies on or after 1 October 2010, the concession applies to employment business that would have been required to be registered with the Care Quality Commission before that date.
For the supply of nursing auxiliaries or care assistants to benefit from the concession, they must undertake some direct form of medical care, such as administering drugs or taking blood pressures, for the final patient. The concession does not apply to supplies of general care assistants who are:
- only involved in providing personal care such as catering, washing or dressing the patients.
- working in care homes without nursing where they do not require supervision by health professionals to provide their services.
However, where a state-regulated domiciliary care agency supplies the services of its care assistants directly to the final patient, [HMRC] would see the agency as making an exempt supply of welfare services – see Notice 701/2 Welfare and the welfare services exemption.
2. Care services provided by a person not enrolled on a statutory medical register:
Paragraphs 5.2 and 5.3 of VAT Notice 701/57 confirm that health or nursing care services are VAT exempt where such services are provided either:
- under the direct supervision of a health professional (not including pharmacists) who monitors the services through regular checks; or
- in a hospital or nursing home.
When are services “directly supervised”?
Care services provided by any person who is not a registered health professional, are “directly supervised” for the purposes of the VAT exemption, when all of the following conditions are met:
- the services are supervised by one of the registered health professionals listed in paragraph 2.1 of VAT Notice 701/57, and the supervisor is professionally qualified to perform and supervise the service;
- the service requires supervision by a registered health professional, and is provided predominantly to meet the medical needs of a client;
- the supervisor has a direct relationship with the staff performing the service, and is contractually responsible for supervising their services;
- a qualified supervisor is available for the whole time that the care service is provided;
- no more than 2,000 hours per week of staff time are supervised by a single health professional;
- a supervisor has a say in the level of care to be provided to the client, and will usually see the client prior to the commencement of the care service; and
- the supervisor must be able to demonstrate that they monitor the work of the unregistered staff.
Where all of the above conditions are not met, the services are standard-rated, even when performed to meet the medical or health care needs of a client.
3. The Welfare Services exemption:
Schedule 9, Group 7 of the Value Added Taxes Act 1994 provides that supplies of welfare services and connected goods by charities, state-regulated private welfare institutions agencies or public bodies are exempt from VAT. This means that although no VAT is charged on the supply being made, the person making the supply is generally not entitled to reclaim VAT on the costs of making the supply. The following text has been taken from VAT Notice 701/2 (Welfare):
2. What are welfare services?
Welfare services are services which are directly connected with:
• the provision of care, treatment or instruction designed to promote the physical or mental welfare of elderly, sick, distressed or disabled persons (…). Distressed persons do not include the unemployed;
• the care or protection of children and young persons (…); or
• …
2.1 Services that are directly connected with the provision of care, treatment or instruction 2.1.1 What is care, treatment or instruction?
Care, treatment or instruction includes the protection, control or guidance of an individual when this is provided to meet their medical, physical, personal or domestic needs. Any instruction must relate to the care or treatment of the individual for example showing them how to dress or bath themselves. It does not include the supply of information in the form of advice or help to enable them make an informed decision. For a service to be exempt under this heading the following must be satisfied:
Examples include:
- personal or nursing care (including assistance with bathing, dressing, toileting and other personal hygiene);
- general assistance and support with everyday tasks such as form-filling, letter reading/writing, bill-paying;
- certain routine domestic tasks (see paragraph 2.1.2);
- support or instruction designed to develop or sustain a person’s capacity to live independently in the community;
- protection, control, guidance or companionship that is required to meet an individual’s personal or domestic needs; and
- residential care, including accommodation, board and other services provided to residents as part of a care package.
2.1.2 When are routine domestic tasks exempt from VAT?
Routine domestic tasks (such as housework; simple odd jobs; shopping and collecting a prescription or pension) that are performed by one of the bodies detailed in section 3 are exempt when all of the following conditions are met:
- the recipient of the service is an elderly, sick, distressed or disabled person;
- an assessment of the recipient’s health condition, medical needs and ability to perform each task has been carried out by an appropriately trained person - such as a medical or health professional or any person with relevant training or experience in social work or social care;
- this assessment has shown that the recipient is unable to carry out the tasks safely or adequately (see paragraph 2.1.3) or without significant pain or discomfort (see paragraph 2.1.4), and that this inability presents a risk to their health or welfare;
- a record of each assessment is maintained by the supplier of the service; and
- the service provided is a routine domestic task that the majority of the population would expect to carry out for themselves and which is required to keep a household going. This excludes specialist services such as non-essential gardening, decorating and other house maintenance including re-roofing, plumbing and electrical services.
3.3 What are state-regulated private welfare institutions and agencies?
3.3.1 General
State-regulated private welfare institutions and agencies are establishments or other providers that are registered with, and/or regulated by, one of the following regulatory bodies:
- Care Quality Commission;
- Scottish Commission for the Regulation of Care (The Care Commission);
- Care and Social Services Inspectorate Wales;
- Northern Ireland Regulation and Quality Improvement Authority;
- Office for Standards in Education (OFSTED); or
- Any other similar regulatory body.
State-regulated private welfare agencies include domiciliary care agencies, independent fostering agencies, voluntary adoption agencies and nurses’ agencies.
3.3.2 When does a business become state-regulated?
3.3.3 A welfare provider becomes state-regulated when the relevant regulatory body approves its application to register. The provider is not state-regulated whilst its application is under consideration and so it may not exempt its supplies of welfare services during that period.
[para 4 not copied here]
5. Supplies of staff
Employment businesses in the welfare sector make a taxable supply of staff to third parties, such as local authorities, if the third party is legally responsible for the onward supply of providing care to the final recipient.
But, when state regulated welfare providers provide welfare services to the final consumer, these services remain exempt even if they are contracted and paid for by a local authority or other third party. For example, a local authority may contract out the provision of domiciliary care services for the elderly or disabled to a state regulated domiciliary care agency.
Although the local authority rather than the final consumer may pay the domiciliary care agency charities for the care services, for VAT purposes the care agency has still made an exempt supply of welfare services rather than staff to the local authority. This is because the care agency’s staff will still be working directly to the agency itself throughout the provision of the services rather than to the local authority.
Exemption would also apply to cases where a local authority or other body subcontracts the provision of adult placement schemes. Under these schemes a ‘worker’ provides personal care or support services to adults living with them or living in their own homes. Currently scheme providers need to be registered with the Care Quality Commission.
Sometimes local authorities make payments directly to people who have been assessed as needing help from social services, and who would like to arrange and pay for their own care and support services instead of receiving them directly from the local council. These arrangements are called direct payment schemes, and any welfare services provided to the recipient by a charity or state regulated private institution or agency are exempt from VAT. But, supplies to recipients of direct payments that are not made by a charity or state regulated private welfare institution or agency are subject to VAT at the standard rate.
Always take detailed VAT advice before applying this exemption to your supply.
Alternative business models that may be used to reduce VAT charged
Following the withdrawal of the Staff Hire and Business Brief Concessions on 1 April 2009 (see above: 'What is the difference between a concession, an exemption and zero rating') and the Reed case in 2011 (see above: 'Do I have to charge VAT on my fees?'), there has been much speculation as to whether alternative business models may be used to mitigate the liability for VAT on the use of temporary workers. Each of the following models requires the co-operation of the hiring client and will vary depending on the arrangements that best suit the client. For this reason the REC is unable to supply members with generic terms and conditions that satisfy the necessary criteria to ensure that VAT will not be chargeable.
Before entering into any proposed alternative supply model you should obtain detailed tax and legal advice to ensure that the correct corporate vehicles are used and that contracts are properly drafted.
- The “Agency Model” / "Direct Engagement Model" - An employment agency introduces work-seekers for engagement directly by the client. The work-seekers are engaged directly by the client and the client is solely responsible for paying them. In these circumstances the employment agency is prohibited from either paying or making arrangement to pay the workers on behalf of the client (Regulation 8 of the Conduct of Employment Agencies and Employment Businesses Regulations 2003 - the Conduct Regulations).
Importantly, due to this direct relationship between the client and the worker the client is at a greater risk of a successful claim for employment rights from the worker, even if they are engaged on a contract for services. Most clients will not find this situation acceptable, unless the saving in VAT outweighs the risk and costs of the work-seeker claiming employment rights directly against them.
If you consider using this “agency” model we recommend you seek guidance and/or clearance from HMRC as to whether VAT is being charged correctly and to ensure that the arrangement complies with the Conduct Regulations.
- Joint employment contracts - In cases of joint employment, there is no supply of staff for VAT purposes between the joint employers and no tax is chargeable on a reimbursement of the cost of those staff from one of the employers to the other. Workers will only be jointly employed if their contracts of employment make it clear they have more than one employer and specify who those employers are. Staff will not be regarded as jointly employed if they are employed by the employment business but are required to provide their services to a client. They must be required to provide their services to both employers at the same time. Liability for employment rights and risk will also be shared by both employers. This is set out in paragraph 3.2 of VAT Notice 700/34.
- Joint Venture Company
Supplies of staff by a company set up jointly by an employment business and their client may be regarded as supplies within the same VAT group and therefore not attract VAT. However the joint venture company would need to be controlled by the hiring client and the employment business may therefore lose out on any income derived from the supply.
I supply limited company contractors. Can I charge VAT on margin only?
The arrangements for VAT will be the same whether you are supplying limited company contractors or individuals because VAT is charged according to the service you provide i.e. that of an employment business or an employment agency.
Acting as an agency
If you act as an employment agency i.e. introduce the limited company contractor to the client who then engages the contractor directly, you charge an introduction fee which is VATable. Where the limited company contractor has not opted out of the Conduct of Employment Agencies and Employment Businesses Regulations 2003 (the Conduct Regulations) the client must pay the contractor directly (Regulation 8 prohibits an agency from paying a work-seeker introduced to and engaged by a client). However if the contractor has opted out of the Conduct Regulations you may introduce the contractor to a client and continue to pay the contractor as the prohibition in Regulation 8 does not apply. In these circumstances, you should charge VAT on your margin.
Acting as an employment business
You act as an employment business when you supply temporary workers to work for your clients. When supplying limited company contractors, if the limited company contractor is registered for VAT they will have to charge VAT on the full cost of their services and you will need to charge this on to your client, as well as the VAT on your services.
VAT reverse charge in the construction sector
The government have postponed the VAT reverse charge to now take effect on 1 October 2020 in the construction sector (via the Value Added Tax (Section 55A)(Specified Services and Excepted Supplies) Order 2019). It is being brought in to tackle what HMRC say is significant VAT fraud in that sector. A VAT reverse charge works as follows: instead of the supplier charging VAT and paying that over to HMRC, the client which receives the VATable service deducts the VAT before or at the same time as paying the supplier and pays it directly to HMRC. So the supplier does not receive the VAT and therefore cannot withhold payment from HMRC.
The reverse charge will apply where suppliers provide specified construction services - those services are based on the definition of construction operations as defined in Section 74 of the Finance Act 2004 but will only apply where payments are required to be reported for the purposes of the Construction Industry Scheme (CIS). Recruitment businesses provide labour to the construction sector and a majority will be registered for CIS or will use CIS intermediaries to pay construction workers. However they do not provide the specified construction services to which the reverse charge will apply.
We are aware that some members have received communications from clients to say that those clients will apply the VAT reverse charge to their recruitment business suppliers. REC Legal has communicated with HMRC over recent months about the charge. HMRC have repeatedly told us that the VAT reverse charge does not apply to the supply of labour in the construction sector. Whilst this is not expressly stated in the legislation implementing the charge, it is stated in HMRC’s agent update for April/ May 2019 (see pages 10 and 11). If members continue to received communications from clients stating they will apply the reverse charge to recruiters’ invoices please direct clients to this update, contact HMRC directly or seek VAT specialist advice.
See HMRC's June 2019 Employer Bulletin covering this point and other points.
The government guidance may also provide useful information; it addresses employment businesses in the last section on the contents list. Click on the last point in the contents to jump to the section relating to recruitment businesses.
Disclaimer
This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full terms and conditions on our website.