VTAXPER67050 - Particular Trades: Employment Bureaux: Introduction

Introduction to employment bureau and the supply of staff

‘Employment bureau’ is a neutral term reflecting that a recruitment business can act as an employment businesses and/or employment agency. Those terms have particular definition for employment regulatory purposes [see the “Employment legislation” paragraph below]. A bureau can act in both capacities, but for any given VAT supply it will be acting as one or the other.

An employment bureau, when acting as an employment business, is making a supply of staff, which is taxable.

For VAT purposes, a supply of staff is a supply of services - under section 5(2)(b) VAT Act 1994, anything done for a consideration which is not a supply of goods is a supply of services.

A supply of staff is made where, for a consideration, a supplier provides another person with the use of an individual who is contractually employed or otherwise engaged by the supplier. The staff are not contractually employed by the recipient of the supply, but come under its direction.

The distinction between a supply of staff and of the services performed by the staff when operating under the supplier’s control is important if a VAT relief, e.g. exemption applies to the underlying services. See Notice 701/57 Health professionals and pharmaceutical products and https://www.gov.uk/hmrc-internal-manuals/vat-health/vathlt2000.

Agent or principal

A bureau involved in supplies of staff may be described as an agent or principal. Those two terms are a convenient shorthand. A bureau may be supplying staff (as principal), or introductory services (as principal). Since a bureau supplying introductory services is bringing together a worker and client for a fee (commission) it is commonly referred to as being “an agent” or providing “agency services”, so for ease of reference we refer to “agent” and “principal” to distinguish between the two supply possibilities hereafter. VTAXPER67200: The supply possibilities

The First-tier Tribunal in Adecco UK Ltd [2015] UKFTT 600 TC commented that the question of determining the nature of the employment bureau’s supply was logically indistinguishable from the question of to whom did the temps supply their services. Thus, if a worker enters into a contractual relationship with the client, it follows that the employment bureau, in bringing those two parties together, is supplying introductory services. The employment bureau will equally be acting in this capacity where the end client employs the worker under a contract of service.

Conversely, if there is no contractual relationship between the worker and client, the employment bureau, which does have such relationships with both the worker and client, must be making a supply of staff. This is so, notwithstanding that the bureau may not be under any obligation to offer assignments to workers and the workers may not be any under obligation to accept them.

Employment legislation

The recruitment sector in Great Britain is regulated by the Employment Agencies Act 1973 and the Conduct of Employment Agencies and Employment Businesses Regulations 2003 (amended in 2016), “the Conduct Regulations”). The latter regulations specify how employment bureaux should conduct themselves in relation to work-seekers.

The Conduct Regulations refer to two categories of bureaux (which are defined in the Employment Agencies Act 1973):

• An employment agency is in the business of providing services for the purpose of finding workers employment with employers or of supplying employers with workers for employment by them.
• An employment business is in the business of supplying persons in the employment of the employment business to act for and under the control of other persons in any capacity.

It is common for employment bureaux to act in both capacities, under different arrangements.

The Conduct Regulations of themselves do not determine the VAT position however, how bureaux operate, including many of their contractual terms, flow from employment legislation and can thus inform the VAT analysis. The First-tier Tribunal in Adecco UK Ltd [2015] UKFTT 600 TC commented:

‘… where a supplier chooses to carry on its business in order to operate within a particular regulatory regime that can impact on the nature of the supply it makes’.

For example, Regulation 8 of the Conduct Regulations prohibits an employment agency from paying the worker, arranging to, or even introducing the hirer to any party with whom the agency is connected with a view to that person paying, or making arrangements for payment to the worker his/her remuneration. Thus, an employment agency must completely step away from any association with paying the worker. This explains the behaviour of employment agencies in this regard, including those involved in Direct Engagement schemes. VTAXPER67400 Specific circumstances.

Where a bureau pays the worker because it is acting as an employment business, there is a read-across to it being much more intrinsically involved in a supply of staff and, therefore more likely to be a VAT principal in the supply of staff. In considering whether Adecco could potentially be an agent, notwithstanding that the employment regulatory framework made it impossible for it to be one in paying the worker, in 2018 the Court of Appeal said:

‘I cannot see why the tax position should be determined by reference to arrangements other than those that in fact existed and which Adecco could not legally make’.

Background – Staff Hire Concession

From the mid-1990s until 31 March 2009 the Staff Hire Concession enabled bureaux making supplies of staff as principal to exclude the remuneration element when calculating VAT. Thus, PAYE, National Insurance contributions, pension contributions and similar payments could be disregarded in determining the value of the bureau’s supply of the worker. This was set out in Part A of section 4 of VAT Notice 700/34: ‘Staff’ and later also in Business Brief 10/04.

The effect of this concession was that bureau using it only accounted for VAT on their profit, i.e. as if they were merely introducing the worker. This was beneficial where the end client had limited VAT recovery, e.g. NHS trusts hiring locum doctors or financial businesses hiring temporary staff, since they were charged less VAT than the normal VAT rules require.

The Staff Hire Concession was withdrawn from 1 April 2009. Since then employment bureaux have had to apply normal VAT principles and account for VAT as either a principal (supplying staff) or principal (supplying introductory services). This means that bureaux supplying staff have to account for VAT on the full value of their supply, which will include the remuneration element and any PAYE, National Insurance contributions, pension contributions and similar payments to the workers as well as the bureau’s profit. (N.B. sections 6 and 7of section 4 of Notice 700/34, which concern not-for-profit staff secondments by businesses other than employment businesses and the placement of disabled workers under the Sheltered Placement Scheme (or any similar scheme), remain extant).