Supply of Staff

This post will deal with the issues which can effect recharges of staff time for secondments and payments between connected companies.  

In corporate groups it is common for staff to be employed by one company.  This is done so that only one company needs to set up a payroll scheme.  It also ensures that the employees have a clear contract of employment and know who their employer is.  Staff are then requested to work for other companies in the corporate group.  Sometimes those companies will reimburse the payroll company for the cost of those employees. 

 

What about VAT?

Where staff are made available by a payroll company in the above manner, the payroll company is making a supply of staff for VAT purposes.  In a case where the companies of the group have formed a VAT group, there is no issue as supplies within a VAT group are disregarded for VAT purposes.  In some cases, a VAT group is not appropriate or possible. In such cases, the payroll company will be making a supply of staff and that supply will be subject to VAT. 

In many cases VAT on the recharge of staff time is simply ignored.  This can prove particularly costly where the company making use of the staff is unable to recover some or all of its VAT. This especially includes partially exempt businesses, (i.e. charities, financial services businesses, educational and medical organisations etc.) and result in less of the VAT being recoverable.

 

Is there a barter?

Sometimes a payroll company may allow other group companies to make use of staff without charging for use of the staff.  This can still cause additional VAT costs where the business making use of the staff is unable to recover its VAT as described above.  This is because the UK tax authorities have extensive powers to impose an open market value on the supply if payment has not been made within 12 months from the date the ‘supply’ commences. 

Another common scenario is where the payroll company makes staff available to other companies for no charge.  At the same time, another company may provide services – for example office accommodation to the payroll company, also for no charge.  Such an arrangement is a barter arrangement, and the UK tax authorities would expect both parties to account for output VAT even if no payment Is made by the parties.

 

Joint Contracts of Employment

One way of dealing with the recharge of staff time in a VAT efficient manner is to set up joint contracts of employment for staff who work for more than one business. Any recharge of time between the joint employers is not subject to VAT, therefore avoiding the problem of irrecoverable input tax.

A word of caution – the UK tax authorities will only accept a joint contract of employment exists where the contract makes it clear that the employee has more than one employer.  A joint contract of employment does not exist if the contract states that the employee needs to work for whoever the employer requests. 

It is worth noting that there is a concession in place where one charity seconds a member of staff to another charity that no VAT applies.  The conditions for this are complex and beyond the scope of this note.