VTAXPER67200 - Particular trades: employment bureaux: the supply possibilities

A bureau can act as a principal supplying staff, or a principal supplying introductory services, but not in respect of the same supply. For any given supply a bureau will be one or the other. Bureaux are free to choose how they operate, with the consequential associated tax and regulatory implications. The correct VAT treatment will turn upon the facts, including the contracts, providing they reflect the economic reality.

The bureau makes a supply of staff

The worker may be:

  • an employee bound to the bureau by a contract of service;
  • self-employed and responsible for their own tax and national insurance, making a supply to the bureau under a contract for services,
  • self-employed but where the bureau accounts for tax and national insurance (often described as “PAYE” workers), making a supply to the bureau under a contract for services. [ESM2001 ]
  • engaged via another employment bureau, an umbrella company or a Personal Services Company (PSC) [VTAXPER67400 Specific Circumstances].

The worker provides his/her services to the bureau, umbrella company or PSC, which makes an onward supply to its client. The wages, income tax and national insurance contributions of the worker are part of the cost which the bureau must bear and pass on in making its supply and output tax is due on the full charge to the client.

In cases where the worker is supplied to the employment bureau via another employment bureau (or potentially more than one), an umbrella company, or through a PSC, the principle remains the same. The other entity makes a supply to the bureau and the cost of this is included within the onward supply from the bureau to the client. Where the entity supplying the bureau is VAT registered the bureau is able to claim VAT it is charged as input tax because it relates to a taxable supply of staff.

There is a continuing contractual relationship between the bureau and the worker (or the entity which supplies the worker, e.g. the worker’s PSC). The agreement between bureau and worker will specify the rates to be paid to the worker or entity supplying it. This relationship may be reflected in both the promotional literature - which may use terms such as ‘our staff’ etc. and/or the agreement between the bureau and client.

The client will usually be charged an overall sum by the bureau, and in many, but not all, cases will be unaware of the proportion of this charge paid to the worker. It does not, however, follow that, if a client is aware of the bureau’s profit, or is capable of working it out, then the bureau must only be acting in an introductory capacity. The way the bureau charges, including the transparency, is simply a factor which may support the analysis of the nature of the bureau’s supply.

Where there is no /contractual relationship between the worker and client the bureau cannot be acting in an introductory capacity.

On a practical level the worker will personally perform the services for the client, typically at the client’s premises. The supply of services is nevertheless still being made by the bureau to its client; the worker (or the entity supplying the worker) is doing what is they are obliged to under the terms of their agreement with the bureau. That was the position in Adecco, where the First-tier Tribunal, Upper Tribunal and Court of Appeal found for HMRC. Although the workers did physically attend the end client’s premises to carry out their duties and came under the control of the client, that was something the workers had agreed with Adecco and not with the client.

It is of no significance that the bureau may not be obliged to offer a worker any assignment at all or that a worker does not have to accept an assignment that is offered; it is where an assignment takes place that the employment bureau’s role has VAT consequences.

In finding against HMRC in 2011 the First-tier Tribunal in Reed Employment Ltd saw significance in both the lack of control of the temp by Reed and lack of obligation on the temp to accept an assignment. It found that Reed was acting as agent. However, that judgment was overturned in 2018 when the Court of Appeal in Adecco said it was unpersuaded by those points the FTT in Reed had highlighted and it expressly found that Reed Employment Ltd had been wrongly decided.

The temporary workers in question might be highly qualified, registered with professional bodies and/or exercise their own skill and judgement during assignments, with minimal supervision, direction or control by the end client. The key to there being a supply of staff is that there is no contractual relationship between the worker and the client, but there is between the worker and the bureau and between the bureau and the client.

The bureau makes a supply of introductory services

A bureau acting in an intermediary/introductory role, brings together workers and clients so that:

Here output VAT is only due on the fee/commission charged to the client for the bureau’s supply of introductory services.

In this situation, the worker is employed (or the entity supplying them is engaged) by the client, who will be responsible for any employer obligations. The Conduct Regulations prohibit employment agencies from paying workers whom those agencies have introduced to a hirer.

If the bureau acts as agent it will take its introductory fee and, where it has introduced permanent staff, end its involvement. Where the client asks the bureau to act on its behalf in paying the travelling and subsistence expenses of candidates attending interview, the bureau may treat these payments as disbursements for VAT purposes. But where expenses are paid to interview candidates from within the bureau’s agreed commission, these are not disbursements.

Where it has introduced temporary workers, the bureau and client will sometimes agree that the bureau will continue to provide certain services for the client. For example, in the case of locum doctors supplied to the NHS, the bureau may continue to carry out legally required checks on the suitability and eligibility of the locums. (See section on direct engagement schemes in VTAXPER67400 Specific Circumstances).

The bureau acts as agent for the worker

In most cases bureaux are prevented from making charges to workers. However, Schedule 3 of the Conduct Regulations provides for occupations where employment agencies may charge fees to work-seekers, including: performers, composers, models and professional sports persons. The main indicator of this situation is that the continuing contractual relationship is between the bureau and the worker. This should be clearly stated in the agreement between bureau and worker. The bureau may collect the worker’s wages and deduct its agency fee at source, passing the balance to the worker, but the agreement will clearly state that this is the worker’s money; the bureau is merely acting on his or her behalf. Where fee charges are made, they are consideration for a taxable supply of services by the bureau to the worker (and not the client) and are standard-rated.

Where the worker is not registered for VAT, the bureau must not issue tax invoices or charge VAT for the supplies made by the worker. However, if the worker is VAT-registered the bureau may issue tax invoices in the worker’s name quoting the worker’s VAT number.

Alternatively, the bureau may choose to adopt the provisions of section 47(3) of the VAT Act 1994 and act in its own name, treating the supply as received and made by the bureau [VTAXPER37900].

The bureau acts as agent for both the employer and worker

This situation is comparatively rare but if both parties are charged a fee, output tax must be declared on the two charges. The indicators to look for will be a combination of those listed in the two previous sections.