Being charged VAT on the full cost of temporary agency staff rather than just the commission has long been a cause of irritation for organisations that cannot recover VAT . This treatment has applied ever since HMRC removed the staff hire concession in April 2009.

In 2010 there was hope that HMRC would be forced to change their policy following the VAT tribunal decision own the Reed Employment case where VAT was only found to be due on the value of the agency commission and not the full amount paid by the client to the agency. Unfortunately this didn’t happen as HMRC argued that the situation being considered by the tribunal predated changes to employment agency law that meant that it was the agency that had to be the employer. Another test case was needed.

The Adecco case was this long awaited test case. It was on the same point as Reed – whether VAT was due on the agency commission or full price of staff. The businesses that used the staff in the case of Adecco were banks. If VAT is only due on an employment agencies commission it is the client of the agency that gains directly rather than the agency. This means that if the Court had found for Adecco it would be its bank clients that obtained a refund. It is perhaps unfortunate that the agency did not provide services to the Charity sector as although the law should be the same, in a finely balanced case perhaps the Courts are more likely to reach a decision that refunds a charity rather than a bank.

The decision reached by the tribunal was finely balanced but Adecco lost. The judge did not agree with the earlier Reed decision and found VAT was due on the full value of the staff supplied. The Court argued that it was the contractual position that mattered and contractually the staff were supplied by Adecco. The ‘economic reality’ argument that VAT was only due on the commission was rejected.

The Tribunal accepted that it was unfortunate that two different tribunals had decided differently on similar facts but took comfort that it would probably be appealed. This is of course true. Had it gone the other way and HMRC lost then they would have taken it further as well. One suspects in fact that this is a case that will ago a lot higher and is unlikely to be fully resolved for a number of years to come. It may well stretch into the next decade.

Because it may take such a long time to resolve it makes sense for agencies to make protective claims. If you have been charged VAT on the full value of agency staff and cannot fully recover VAT you should contact your agency.For details of the decision see : Adecco Tribunal Decision