Cost of temporary staff could increase by 20% for charities

A Court of Appeal ruling that employers must pay VAT on the wages of temporary staff could cost the charity sector an estimated £20 million.

The Court recently issued a ruling in the case of ‘Adecco & others vs HMRC’ that VAT is due on the whole amount the employment agency charge their clients for the use of temporary staff, rather than payable on their agency fees only. The Court’s reasoning was that the temporary staff’s services were supplied by Adecco as principal and not as agent.

The Court’s decision was based on the following facts:

  • there were no contracts in place between the temps and the clients;
  • the temps had contracts with Adecco which referred to the temps’ services being supplied ‘through Adecco’;
  • Adecco passed control of the temps to the clients;
  • Adecco paid temps on its own behalf, not as agent for the clients;
  • Adecco did not ‘drop out of the picture’ once it had introduced a temp, since it was responsible for paying the temp regardless of receiving payment from the client. 

The effect on the charity sector

This decision could significantly impact charities using temporary staff for non-business or exempt purposes, as the additional VAT will be irrecoverable and result in an absolute cost. It’s estimated that the additional cost of VAT to the sector will be in the region of £20 million per year. It may also impact other similar arrangements with agencies, such as taxi services, transport, training/education, online services and many other types of business based on the agent/principal arrangement.

We would recommend you undertake contract reviews to determine whether they will be impacted by this decision. If so, it may be possible to restructure the arrangement in order to mitigate any future VAT cost. 

It may also be worth reviewing any partial exemption method utilised, in order to ensure that it’s still fit for purpose and achieves a fair and reasonable result.

For further information, please contact your usual Moore Stephens contact or our not-for-profit VAT specialist, Terri Bruce.

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