Questions have cropped up recently in relation to whether supplies are of staff or services and, where there are supplies of staff, whether it is just the profit margin which is subject to VAT.
This is an area which has been heavily litigated by HMRC over the last 10 years, but is still causing clients issues as their competitors look to obtain an advantage in a tough market by not charging VAT.
The issue of whether a supply is one of staff or services often arises in the care sector where a supply of services can qualify for exemption from VAT and reduce a likely irrecoverable VAT cost to the customer. However, the position can be quite nuanced and the contractual position is not always as robust as we would like.
Whilst the number of cases which have been heard by the Courts shows the willingness HMRC has to assess and litigate in the sector, it also provides us with a strong steer on the types of things the Tribunal would expect to see in a contract where there is a supply of a service. This helps us make sure clients have a strong fact pattern in getting the right answer. Usually, the supply of services will be supported by the provider having a large amount of supervision and control over the work the employees are undertaking. If that supervision and control sits with the recipient, there is more likely to be a supply of staff which is often subject to VAT (with very limited exceptions).
Where there are supplies of staff, there has been extensive litigation over the years as to whether the employee cost is subject to VAT as well as the management fee. Whilst there are structures out there which can circumvent the VAT on the employee cost element, these are Also now being attacked by HMRC under its protection of the revenue powers. HMRC will look at any arrangement involving staff closely with a view to assessing for VAT where the contractual position and substance of the transactions in reality do not support the position.
The issues above are always important as the values tend to be large within the context of the organisation and any assessment from HMRC can often be fatal to the businesses ability to continue trading. There can also be real issues where business owners are seeking an exit and a potential VAT liability is flagged as part of the due diligence.
