Charities must still pay VAT on costs of temporary workers, says HMRC

One tax specialist says the statement is "sour grapes" and charities should challenge it


Charities and other employers must continue to pay VAT on the whole cost of employing temporary workers, despite a recent tribunal ruling, according to HM Revenue and Customs.

A recent VAT tribunal decision in the case of Reed Employment Ltd v Revenue & Customs suggested tax might be payable only on commissions paid to employment agencies and not on workers’ salaries - a change that charity finance experts estimated would save the voluntary sector £20m a year.

But HMRC said the case was of limited importance and would apply only to a small number of historical contracts.

Revenue & Customs Brief 32/11, issued last week, said: "HMRC do not regard Reed as having any wider impact, particularly in relation to the VAT treatment that should apply to employment bureaux operating in the current market conditions and regulatory regime."

Bill Lewis, a tax expert at the law firm Bates Wells & Braithwaite, said charities should encourage their employment agencies to challenge the decision.

"This is sour grapes on the part of HMRC," he said. "HMRC has never liked this law and, now a judgement has gone against it, it’s said it doesn’t create a precedent.

"My advice to charities is not to be put off by this, and to encourage their employment agencies to challenge the ruling."

Charity VAT specialists have estimated that if employment agencies charged VAT only on their commissions, the saving to the sector would be about £20m a year.

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