Temp agency case muddies the VAT waters

Organisations using employment agencies to source their temporary workers will have to continue to pay VAT on agency charges, a recent VAT Tribunal found.

The case of ‘Adecco’ found that VAT remains payable on both the value of the wages and the agency’s commission.

The Tribunal found that, as there was no contract between the end business and the worker, the consideration paid had to be for the whole service provided. The agency considered that VAT was only chargeable on the commission element as the agency had no control over the workers’ duties or activities.

At first glance this case appears to directly contradict a decision from 2011 based on similar facts involving a different employment agency; however, rules have changed in the meantime, and this Tribunal came to a different conclusion. Perhaps unsurprisingly given the uncertainty and the large sums of money involved, the case is undergoing an appeal which should help to clarify the law to employment agencies and users of temporary workers.

The appeal was raised by an employment agency that made a claim for overpaid VAT on their services, so further developments in the case will principally be of interest to these types of business. However, any businesses that hire temporary workers from agencies and cannot fully recover their VAT might be affected by the ultimate outcome of the case.