HMRC has refused to budge on its insistence that charities must pay VAT on the wages of temporary staff, confirming the likelihood of a test case being brought on the issue.

Charities had been encouraged by the result of Reed Employment Ltd vs Revenue & Customs, which agreed with the employment agency’s argument that it should only charge VAT when introducing staff to partially exempt organisations such as charities, not on those individuals’ subsequent wages.

However, last week HMRC released Revenue & Customs Brief 32/11, which indicated that it would not change its policy as First Tier Tribunal decisions are not binding, and also because the Reed case applies to an historical period prior to HMRC’s change in policy in 2009.

Graham Elliott, head of VAT at haysmacintyre, told civilsociety.co.uk that the move was not unexpected, and that HMRC had previously declined to appeal the Reed case in order that the Upper Tribunal could not pass down a decision that would be binding.

“Given how much revenue is tied up in this, and how much cost is tied up in this for charities, the financial sector and other organisations, it is highly likely that another case will be brought based upon a more recent scenario.

“HMRC are at the very least playing for time on this and hoping for a better result.”

He added that he had heard rumours of a major charity putting together a “fighting fund” with other charities to challenge on the issue, but said it might also be an employment agency that takes up the case.

On the likelihood of success, Elliott hinted that HMRC’s case may be stronger than is commonly believed, saying only that it is “finely balanced”.

Graham Elliott will be speaking at the Charity VAT & Tax Conference on 17 October. To book your place visit Civil Society Events.