VAT ruling on supply of temporary staff

A recent First Tier Tribunal involving Reed Employment Ltd has introduced a new way of determining the value of supply for VAT purposes, when employment agencies provide temporary staff.

Reed sought a VAT refund from HMRC on the basis that VAT should be applied on Reed's commission only and not on the whole amount payable by the client for a temporary worker. The Tribunal ruled in favour of Reed, saying it did not 'control' temporary workers in the same way as it did employees - when it would be able to say where, when and for whom the staff would work. It concluded that Reed's role was one of introducer rather than supplier of staff, and that VAT was only due on the amount retained by Reed - its commission - but not on the amount passed on by Reed to the temporary worker.

However, the Tribunal also ruled that 'unjust enrichment' is applicable to refunds, obliging Reed to pass the refund back to its clients.

Impact of the ruling

This decision will potentially affect businesses in those sectors with input tax restriction, such as insurance, finance, charities, medical and health. Partially exempt users of temporary staff should therefore consider whether they may be entitled to a refund from their employment bureaux.

As this isn't a straightforward matter, we wouldn't recommend that employment agencies start accounting for VAT on a commission-only basis without first taking professional advice. It is also believed that HMRC may restrict the scope of this decision to employment bureaux with the same trading relationships as Reed - that is, those with no contractual control over their temporary workers.

For advice on this and other VAT issues, contact our indirect taxes partner Bob Jones on 020 7516 2295 or email rjones@littlejohnllp.com, or manager Luigi Lungarella on 020 7516 2228 or email llungarella@littlejohnllp.com