Some employment businesses may have incorrectly charged VAT on supplies following the withdrawal of the VAT staff hire concession according to the First Tier VAT Tribunal.

In Reed Employment v Commissioners LON/2004/0130 the Tribunal considered the economic reality of the taxable supplies made by the staff agency. It found that the supply by Reed of temporary staff was actually limited a supply of introductory services. It did not provide the workers as principal as it was unable to exercise control over the temps provided.

The VAT staff hire concession was withdrawn on 1 April 2009. Reporting the case in its weekly tax publication advisers KPMG say that if HMRC’s interpretation is invalid then VAT charged by employment businesses since April 2009 on the remuneration, PAYE, NIC etc element of charges made to hirers has been charged in error. This means that employment businesses are eligible to make a claim for this overpaid VAT subject to the normal rules.

HMRC may argue “unjust enrichment” so that employment businesses would have to repay any refund of VAT to the hirers. For hirers in the exempt and partially exempt sectors this would represent a significant saving. 

KPMG note that “it is probable that HMRC will say that the decision is fact-specific and thus further litigation may be required in respect of claims.”

Following the judgment (and confirming KPMG's suspicions) HMRC issued Business Brief 32/11 declaring that the case does not have any wider impact as "a judgment of the FTT Reed is only binding on the parties to the appeal. It was decided on its specific facts which involved an historic claim and concerned tax periods up to 1996. The Reed decision differs from the earlier judgment of the tribunal in Hays Personnel Services Ltd (LON/95/2610) in which the Tribunal determined that Hays was a principal and VAT was due on the whole consideration received."