In March of this year the First Tier Tax Tribunal held, in the case of Reed Employment Ltd v HMRC, that an employment bureau providing temporary workers should apply VAT only to the commission element of its charges to clients, rather than the full amount invoiced (which included the worker's pay, tax and NIC). Having analysed the facts, the Tribunal found that the bureau's supplies consisted of introducing workers to its clients, rather than making a supply of staff as a principal; the amounts paid to the workers were not therefore to be regarded as 'cost components' of Reed's own supplies.

The Tribunal however went on to rule that Reed was not entitled to reclaim the VAT which it had overcharged, on the grounds that this would constitute 'unjust enrichment'. We reported in April that HMRC had decided not to appeal the decision, although this did not necessarily mean that it had accepted the Tribunal's findings.

Some five months later, HMRC has now published a Business Brief in which it states that the Reed decision was "decided on its specific facts" and that "HMRC therefore do not regard Reed as having any wider impact".

Smith & Williamson's comment:

HMRC is relying heavily on the principle that a decision of the FTT is not binding on other parties. However, in the weeks which followed the decision, it became clear that the essential facts on which the Tribunal based its decision were common to many employment businesses. Employment bureaux have been under great pressure from clients in the health care, housing association, charity and financial sectors, for whom VAT is a significant cost, to change their charging policies in line with the Reed decision, and we understand that some have already done so.

If HMRC was hoping to restrict the effect of the decision, its response has come far too late.

It is notable that the Business Brief does not suggest that the Tribunal's approach was incorrect in any way. The Tribunal made a number of important points which, in our view, are clearly applicable to other taxpayers - in particular, that:

the proper analysis of the nature of Reed's supply to its clients does not depend on whether Reed was acting in a particular case as principal or as agent;

it follows from this that the regulatory framework is not determinative;

it is essential to consider what the supplier is capable, as a matter of contract, of providing, and on that basis to consider what in economic reality has been supplied. "In the case of Reed, at no time did Reed exercise control over its temp workers, such that control could be ceded by Reed to its clients. The making of a supply of staff must in our view, at the least, connote a passing of control of staff from the supplier to the person receiving the supply. There is no such passing of control in this case"; and

"the payment which Reed makes to the temp worker [...] is not a cost component of Reed's own supply".

What should employment agencies do?

It now seems inevitable that it will take another case to resolve the issue and the position will, for months or perhaps years, remain unclear.

Employment businesses and their clients will need to keep a close watch on developments in this area. It is clear from the Reed decision, and indeed from HMRC's response, that the VAT treatment will depend on a close analysis of the facts - both the contractual terms and the commercial reality.

Employment businesses who are considering changing their charging structure in line with the decision will need to think carefully about the risks and ensure that they are able to pass on, or otherwise deal with, the VAT under-charged to their clients if the final outcome favours HMRC's approach.

For further information, please contact Martin Sharratt, head of VAT at Smith & Williamson on 020 7131 4529.