Suppliers of temporary staff should normally charge VAT on the whole of their charge – i.e. both the individual’s salary, NIC, etc and the agent’s commission. This was confirmed by the Court of Appeal in 2018.
An exception to this is where the individuals are registered nurses, or nursing auxiliaries working under the direct supervision of registered nurses. Under an HMRC concession, the agencies can provide these services exempt from VAT.
We are aware that many agencies have applied this concession too widely and included temporary care staff within this concession. We reported last summer that HMRC has started to undertake inspections of several of these agencies.
Over the last year, we are aware that HMRC has carried out further inspections and issued assessments to these ages – in most cases going back four years.
While it is the agent that will receive the assessment from HMRC, the agent will then invariably seek to pass on this VAT to their customers.
From our experience so far, it appears that most contracts are VAT-exclusive and the agent will send a VAT-only invoice based on 20% of the charges that have been issued in the last four years. VAT will also then be charged going forwards.
With many providers struggling to find permanent staff in the current challenging climate, there has been an increased reliance on temporary staff. In our experience, the majority of agencies have not been charging VAT, and so many providers may be facing a large VAT bill.
For most providers, this VAT is not recoverable, so it represents a one-off cost payable immediately plus higher operating costs going forwards.
It may be possible to resist a retrospective VAT charge. A contract that is silent on VAT is deemed to be VAT-inclusive. However, our experience so far is that most contracts allowed VAT to be charged on top of the agreed fee if due.
In other situations where they accepted that the wording of a concession was unclear, HMRC has agreed that the correct VAT treatment only needs to be applied prospectively. However, we have seen no indication to date that HMRC consider their nursing staff concession is ambiguous.
If some of the services you provide are paid for by local authorities, it may be possible to restructure the way you provide these services to enable VAT to be charged on these. This would enable a proportion of the VAT incurred on agency staff to be recovered from the date you implement the new arrangements.
If you have previously decided this opportunity was not worthwhile due to the quantum of VAT you incurred, it may be worth reviewing this assuming that all temporary staff costs are subject to VAT.
Going forward, if you have a choice of agents that are adopting different VAT treatments, it would make sense to assess these on the assumption that all suppliers will charge VAT eventually – unless they are willing to agree a VAT-inclusive price.
Similarly, if you are making a decision about whether to employ permanent staff, you should benchmark their employment costs against an assumption that you will incur VAT from an agency.
If you would like to discuss how this might affect you further please contact Adam Cutler from our VAT team, tel 020 7842 7162.