A Court of Appeal ruling that employers must pay VAT on the wages of temporary staff could cost the charity sector an estimated £20m in taxes.
In the case, Adecco and others v HM Revenue and Customs, judges ruled that VAT is chargeable on the staff remuneration element of a payroll charge made through a staff agency.
Many charities use temporary workers employed through an agency. Unlike most commercial companies, they cannot reclaim VAT on the agency fees because their services are either not business services, or are exempt from VAT. So this could have a broad effect on the sector, roughly estimated to cost it up to £20m.
Graham Elliott, technical adviser to the Charity Tax Group, wrote in a blog post that a further appeal to the Supreme Court is now unlikely.
He said: “A massive VAT disadvantage to this form of flexible employment structure has been created, in such a way as to amount to a restrictive practice, particularly of disadvantage to the charity sector.
“The courts may have made the application of the law clear, but it is now down to the politicians to consider whether changes should be made which can rescue the law from these unintended consequences.”
Charities had been encouraged by the result of Reed Employment Ltd vs Revenue & Customs in 2011, 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.
HMRC did not appeal the decision but issued a briefing later that year, indicated that it would not change its policy as First Tier Tribunal decisions are not binding, and because the Reed case applied to an historical period prior to HMRC’s change in policy in 2009.
The court in the Adecco case said the facts were different to the Reed case, and that the original Reed decision was wrong in any event.