The VAT treatment of supplies made by staffing agencies has presented those businesses with ongoing difficulties for many years. The withdrawal of the staff hire concession in 2009 impacted on agencies generally with the full value of charges for staff becoming a supply from the staffing agency to the employer of staff hire rather than the margin being treated as commission. Prior to this it had been accepted that staff agencies need only consider ‘commission’ i.e. the difference between the amount charged to the employer and the amount paid to the temp, for VAT purposes, effectively acting as intermediaries. The recent case Adecco [UK UT 0113] refocussed employment businesses on this area but unfortunately arguments that VAT should be accounted for on ‘commission’ rather than staff charges were unsuccessful.
In addition, nursing and care agencies have a number of complexities around whether supplies are VAT exempt or standard-rated and it is fair to say that the approach taken regarding VAT accounting has varied quite considerably (it is also fair to say that historically, very different local approaches have been taken by HMRC).
VAT exempt or standard rate?
The first point to address is that, a supply of nursing or care staff by an agency is a supply of staff rather than a supply of medical care or welfare, the result being that a staff supply is not in itself VAT exempt. However, there are two potential paths to VAT exemption:
- A supply of nursing staff by an agency under the nursing agencies concession. This may be to a hospital or care home institution as long as the individual supplied is providing medical care and certain other criteria are met. This concession allows the agency the option to look through to the end supply where otherwise this would simply be a standard-rate supply of staff.
- A supply of general domestic care services (welfare) or medical care, generally to an end user in their own home.
Both the areas above have their own complexities and there are a number of requirements for VAT exemption to apply. Additional considerations may be present such as whether it is desirable to apply the nursing agencies concession. Where a customer is able to recover VAT charged, making a supply of staff subject to VAT may improve an agency’s VAT recovery position under the partial exemption rules.
The supply of general care staff to nursing homes e.g. homes for the elderly, has probably been the area most misunderstood historically. The supply of general care by the care home to its residents will normally be VAT exempt. This means the care home will not be able to recover VAT on costs directly related to this such as VAT on staffing costs. The supply by the agency to the care home is a standard-rate supply of staff where those staff will be under the control and direction of the care home, producing an irrecoverable VAT cost for the home.
Umbrella organisations may provide some efficiencies for tax purposes but can be problematic for VAT and nursing agencies in particular. It is doubtful that the nursing agencies concession would cover the supply from an umbrella organisation to a nursing staff agency (HMRC guidance does not cover the point). The wording of the nursing agencies concession and experience suggests that umbrella organisations are not covered by the concession.
This may lead to a position where VAT should be charged by an umbrella organisation supplying staff to a nursing agency but, if that nursing agency is choosing to use the nursing agencies concession for its onward supply of nursing staff, it is likely it will have no right to recover the VAT charged due to its VAT exempt supplies.
Again, confusion around the nursing agencies concession, the chargeability of VAT and the contractual agreements in place have produced a risk scenario that may equally affect both the umbrella organisation and the nursing staff agencies. If HMRC view VAT as due from the umbrella organisation and its contract allows the collection of VAT in addition to any fee, the umbrella organisation’s mistake may become the nursing agencies problem if contractually the agency can be charged VAT.
Similar principles affect doctors working through locum agencies. This is potentially higher risk from a VAT perspective as there is no equivalent to the nursing agencies concession for doctors. Where a doctor is supplied to a hospital or GP surgery by an agency and will be under the control and direction of the hospital or surgery this is a standard-rated supply of staff and is subject to VAT. The doctor themselves also need to consider their position in relation to VAT registration depending on circumstances as HMRC may view them as making taxable supplies to the agency in a similar situation to that of umbrella organisations.
It is essential that agencies take steps to ensure that they are VAT compliant, understand their position for VAT purposes and have appropriate contracts in place. A systematic VAT liability error can quickly lead to large VAT debts and these may be subject to error penalties if HMRC believe the errors are careless and will certainly be issued if considered deliberate. There are a large number of businesses whom may be at risk from incorrect interpretation of the provisions and it is our expectation that HMRC will make this a focus area in the future.