Understanding the UK VAT treatment of paymaster services

The UK VAT concession relating to paymaster services has existed for a number of years so is considered a “well-trodden path” for many. However, we have noted an increase in queries around the complexities of its operation. The triggers for recent queries have included: a corporate group restructure where there is a change to the entity engaging the individual, a refresh of contracts or a response to HMRC questioning the VAT position.

Paymaster is a concession whereby VAT does not need to be accounted for on certain recharges of staff costs. Its operation takes the recharges out of the scope of VAT, effectively as an exception to a default position of UK VAT at the current standard rate of 20% VAT needing to be accounted for.

What is a supply of staff?

A supply of staff is made when an individual, who is contractually employed or otherwise engaged, is provided to another organisation in exchange for any form of consideration (i.e. payment).

The most important requirement is that the individual is not contractually employed by the recipient but would come under the recipient’s day to day direction and operational control (how the individual performs their work).

Is VAT charged on a supply of staff?

In general, any supply of staff for a consideration is subject to UK VAT at the standard rate when supplied in the UK.

This position changes in specific circumstances, and one of these is paymaster services.

What are paymaster services?

Paymaster services can occur between two associated companies where one company pays the salaries, National Insurance and pension contributions (among other services) in the following situations.

• Jointly employed individuals – where one company pays the salaries which it recovers from the other joint employers.
• Where each of a number of associated companies employ its own staff, but one company takes on the role of the paymaster and pays the salaries on behalf of the others and they pay their share of the cost to the paymaster.

Should VAT be charged on paymaster services?

In both of the above situations, the recovery of costs from the joint employers/associated companies (as relevant) is a disbursement for UK VAT purposes and therefore outside the scope of UK VAT. 

However, if charges are made for the following, these will be subject to UK VAT.

• Those that are over and above a simple reimbursement of staff costs.
• Any fee that is charged by the joint employer (responsible for paying the salary) or the paymaster for arranging payment of the reimbursed costs.

What happens if the VAT treatment is incorrect?

It is important to ensure the VAT treatment of supplies made is correct, as this can have implications for both the supplier and the recipient of the services.

What if VAT has been charged incorrectly?

• As output tax has been incorrectly charged any amounts described as “VAT” cannot be reclaimed as input tax by the recipient. 
• The invoicing position will need to be corrected.
• A review will need to be undertaken of all similar supplies to correct the position with HMRC.
• The recipient of the service would have reclaimed too much input tax and will need to carry out a similar review with a view to correcting the position with HMRC.

What if VAT hasn’t been charged and it should have been?

• Again, the position will have to be corrected and a review undertaken to ensure that the right amount of VAT is paid to HMRC.
• The contractual agreements need to be reviewed to ensure that this allows for VAT to be charged in addition to the value of the services provided.

What else should be considered?

There is often a lack of formality with inter-company arrangements as organisations often don’t prioritize documenting their internal arrangements. This can also be the case with paymaster services arrangements and can be of detriment, as HMRC will normally ask to review the underlying contracts and written documentation when reviewing the VAT position. It is therefore important that there are contracts and inter-company documents in place which reflect what is happening in practice.

We also recommend that a periodic review is undertaken to ensure that internal processes are aligned with the written documentation in place. An internal reorganisation leading to the transfer of employees from one group company to another should also be a trigger to review the appropriateness of paymaster treatment.

For further information, please contact Robert Marchant, or your usual Crowe contact.

This article was first published on Bloomberg Tax Online.