Elwood Recruitments interpretation & Application of VAT on our supply of Labour
VAT (Value Added Tax) is required to be charged by law on goods and services provided by businesses which have an annual sales turnover more than £85,000 (2023-2024 tax year) or £90,000 per annum moving forward. Some small operators will open several businesses under the same ownership, with just a slight alteration to their company name, such as ABC Limited and then ABC group Limited etc. This is designed to avoid hitting the government threshold on VAT registration and thereby enable them to appear more competitive, by promoting a VAT exempt service. This practice raises several compliance risks and adds to the already confused nature of this complex issue which many unsuspecting purchasing groups can fall foul of. We will be addressing all of these points throughout this blog whilst also offering our own views on the common misconceptions of VAT for Charities, Nursing concessions and Welfare provision.
VAT charged on our services is a tax that is paid to HM Revenues & Customs, the government’s tax-collecting authority and DOES NOT contribute to our Margins or any Profits. Our management of VAT is empirical reflecting UK law, and our obligations as we interpret them, are set out clearly within this blog. VAT evasion, which is an offence under section 72(1) of the Value Added Tax Act, has a maximum penalty of 7 years imprisonment and unlimited fine. So is VAT avoidance and saving a perceived 20% worth the risk. Disguised or assumed exemption creates a knife edge which carries great risk and can easily become reinterpreted and deemed VAT evasion when assessed under audit by the HMRC. Demand to know why your supplier isn’t charging you VAT on the provision of labour and if in doubt? Contact Elwood Recruitment for our informed view or take legal advice.
The standard rate of VAT is typically 20% when concerned with the provision of temporary labour, certain items are charged at lower rates or can be zero rated but all VAT when applied against our service provision is at the Standard Rate (currently 20%) commonly known as input tax that businesses pay.
VAT is a “self-regulating tax” which basically means that “we” the business, are responsible for both the interpretation and application of VAT as laid down by the HMRC guidelines that apply to our own business model. This is true for all businesses and therefore the onus of correct application of VAT in terms on INPUT and OUTPUT tax becomes the responsibility of that individual business. This in our view, is the root cause of much of the confusion and poor application of VAT in our sector. Elwood Recruitment will not mitigate poor VAT application by third parties or adopt surrogate VAT notices in a bid to look more competitive. In our opinion, it would be helpful therefore to categorise the actual “provision of service” you are purchasing from any third party to decide whether VAT is being managed correctly and legally, opposed to simply relying on your own Company Status. Being VAT exempt (such as a Charity) doesn’t mean that you purchase goods and services that become automatically exempt of VAT for example. It’s your duty to understand both INPUT and OUTPUT tax.
You shouldn’t therefore confuse your own responsibilities with the status, interpretation, or management of any third-party organisations management of VAT. We can only advise you, as laid out in this document, that it is wholly down to your organisation to regulate your own VAT administrational protocols. Reminding some, in cases where your own business may be deemed as VAT exempt (provision of welfare services for example) this doesn’t mean that the services and goods that you purchase, are VAT exempt, nor does that allow for the provision of exemption from any registered Agency provider who interprets your exemption as a license not to apply VAT against their own service.
Some business models provide for two distinct provisions which are treated differently in terms of the administration of VAT and assessment of any concession or exemption from the same. These types of organisations operate on a Partial VAT basis and can offset against VAT regulated services.
Many Regulated providers are VAT exempt, this means that their “service provision” does not attract VAT and therefore they DO NOT charge VAT on those service provisions. This quite often leads to the confusion and misinterpretation that being VAT exempt means that they do not have to pay VAT on third-party purchased services. This is incorrect in many but not all circumstances as some services provisions may be VAT exempt and, in these cases, several specific criteria must be satisfied.
Care providers specialise within the provision of CARE and in almost all cases, these services are “VAT Exempt” (dependent on qualifying criteria).
Qualifying Criteria
Irrespective of how the service is commissioned or funded if the Service provision falls under CQC/Ofsted registration and is designated as a “Regulated Activity” that service provision becomes VAT exempt. Again, to qualify that, it means that VAT does not need to be added to that provision of their own service. (This doesn’t mean however that they can’t register for VAT should they see commercial reason for doing so and operate a partial exemption model)
As we understand it, the area of assessment for qualification of a regulated activity would be CARE/TREATMENT/PROTECTION/GUIDANCE.
These services are designed to meet their medical, physical, personal, or domestic needs and must be part of a specific individual care plan which is formed by the guidance of a comprehensive risk assessment.
Routine domestic tasks alone are not included unless these tasks cannot be carried out safely and an assessment of this has been completed.
The person receiving the Care/Support would be categorised as; ELDERLY/SICK/DISTRESSED/DISABLED.
Again, an assessment of their needs must be carried out by an appropriately trained person. There is no specific guidance about what constitutes an appropriately trained person but if a referral to a Registered Provider has been made by the clients Doctor or by Social Services, then this is sufficient evidence that the Care is needed and therefore qualifies as VAT exempt. This service can then only be provided by a Registered Provider (CQC/Ofsted registered) and is classed as “regulated activity”.
If the client (Service User) approaches Elwood Recruitment directly or one of their family/advocates does, then they need to evidence to ourselves that this supply does not fall under “Regulated Activities” and is classed as “Domestic Help/Companionship” to justify our provision of Labour (Personal Assistant) and then the application of VAT against those services once again becomes applicable as no “Personal Care” is to be delivered and means it falls outside of Regulated Activities.
Elwood Recruitment –specialises within the provision of contingent “Labour” which operates predominantly under the direction, supervision, and control of our client and importantly under your CQC/Ofsted registration. In almost all cases those services attract VAT at the Standard Rate (currently 20%) based on our former detailed explanations.
Elwood Recruitment also supply consultancy services (Permanent introductions/Training services) which also attract VAT at the standard rate. (20%)
VAT is very complex with an expansive area of technicalities and so in very specific circumstances we are legally able to apply a partial VAT exemption against some very specific provisions. These would require a raft of documentation and warranties that both parties commit to and strict guidelines which must be monitored and adhered to.
Elwood Recruitment for example supply “Qualified Nurses” – This provision is VAT exempt. (No VAT charged) There are other complexities and further risks associated with Self-employment where many Qualified Nurses are concerned and these will be covered in our IR35 blog, which you can now find on our website.
Elwood Healthcare also Supply “Auxiliary Staff”- This provision is also VAT exempt! (Again, Dependent upon detailed qualifying criteria).
Qualifying criteria for Auxiliary Staff.
- The Client we supply must be registered under CQC to provide “Nursing Services”.
- The Temporary staff member being supplied, is placed under the direct supervision of a Qualified Nurse whilst on shift.
- We are provided a current copy “Job description” which details recognised and accepted auxiliary Nursing duties within it.
- We receive a written undertaking (on a client letterhead) that the role we are supplying is to cover the qualifying criteria detailed here within, and a “Deed of warranty” is required to be signed to that effect also.
- The Staff member being supplied by Elwood Recruitment holds relevant training and experience to cover the duties required of them.
All qualifying criteria which Elwood follow must be satisfied by any Labour provider before their supply commences. You must therefore consider if your current provision is actually compliant? Has your agency partner stepped you through this legal framework? Are you therefore satisfied that HMRC would be convinced that VAT is being managed currently, should you be audited against these criteria?
A common misinterpretation is that recruitment businesses that define themselves as “Nursing Agencies” are VAT exempt for all their service provisions. This isn’t the case and It therefore becomes very easy to fall foul of the VAT regulations when being supplied Temporary staff from such a provider, when they are either not a “Qualified Nurse” or acting as an “Auxiliary” with the caveats outlined above, when reliance is being placed on a single status of being a “Nursing Agency”
So why does this matter, If the agency gets it wrong when applying VAT then they become liable for any underpayment of VAT back to the HMRC I hear you say.
When considering HMRC’s comprehensive procedure notes, it is clear to Elwood Recruitment that they are focusing on more complex delivery models, including direct engagement and joint employment.
These are usually driven by the end client’s VAT status and the desire to mitigate VAT charged through to them.
- HMRC is now proactively engaging with the sector to improve tax compliance.
- The revised guidance summarises recent case law clarifications and applies this in a clear manner.
- The guidance also outlines common new delivery models.
- Advice is provided on the interacting Employment Agencies Act and the Conduct Regulations.
- ‘Specific circumstances’ addresses common areas where planning arrangements are in place or where there might be a perceived lack of compliance across the sector.
HMRC has clarified the VAT treatment for several known staffing schemes present in the recruitment sector. In general, it aims to address instances where the end client cannot or has not reclaimed VAT costs. Clearly where providers are in breach, costs and penalties will be applied and there is no doubt that those costs would be passed onto the end user, you the end user.
Elwood Recruitment are not tax experts and would advise that you take professional advice in these matters, we do however have vast experience of providing Temporary Care and Support staff to the Health and Social Care communities. We specialise in both the Children’s and Adults sectors offering a range of bespoke compliant services and professional advice that affords you all the protectections a service such as yours demands.
For more information or if you would like to schedule a call back, contact us today on (01902) 271010 for the Midlands region or 0208 0594493 for Hertfordshire & London Boroughs.