Preparation is key for the VAT rate change

Tue, 8 Dec 2009 | By Sian Beusch, technical senior manager, Baker Tilly Tax and Accounting

As has been widely publicised, the standard rate of VAT will revert to 17.5% with effect from 1 January 2010.  So how should recruitment agencies and in-house recruiters prepare themselves for the change?

1. Recruitment agencies supplying temporary staff

Normally, temporary workers supplied by a recruitment agency have a contractual relationship with the agency, and not the business hiring them.  Following the withdrawal of the Staff Hire Concession with effect from 1 April 2009, where the agency is acting as principal VAT is due on the full amount invoiced to the client (commission plus worker’s salary). 

The supply of staff in these circumstances is regarded as a ‘continuous supply of services’ by the agency.  Services fall into this category where the consideration for work carried out is payable periodically.
 
For continuous supplies of services, the point at which VAT is due is the earlier of the date of issue of the invoice and the date payment is received. This means that services invoiced after 1 January 2010 (where payment is yet to be received) should bear the new 17.5% rate of VAT. However, it is possible for the agency to continue to apply the 15% VAT rate in the following circumstances:

·     Where services were provided pre 1 January 2010 but invoiced after that date

·     Where services will be provided post 1 January 2010 but an invoice is raised (or payment received) before that date.  However, there are anti-avoidance measures to be aware of here, particularly where advance invoicing is greater than £100k to any one client and not part of the agency’s normal commercial practice.

Where the client is fully taxable and can recover all the VAT it is charged, it will not matter what rate of VAT is applied.  In this case it may be more administratively convenient for the agency to apply the 17.5% rate from the earliest possible time.  However, where the client cannot recover its input VAT in full e.g. charities, financial institutions, further education establishments and healthcare providers, for example, they will want to minimise the cost to them of the VAT rate change.  As such, they are likely to expect agencies to elect to invoice them at 15% where possible.

2. Recruitment firms acting as agent    

Where the recruitment agent is acting as an agent for the client, as agent for the worker or for both parties, the continuing contractual relationship is usually between the worker and the client.

In this case, the agency is providing a one-off supply of introductory services for which it charges a commission, usually at the time the new employee commences work.
 
Under the normal rules for this type of supply, tax points created by payments received or VAT invoices issued on or after 1 January 2010 will be liable to the 17.5% VAT rate.
 
However, there are options for the agency to apply the 15% VAT rate (see bullet points under (1) above).  For example, it may be advantageous for a partly exempt client to make a greater payment for retained services before the rate change as this will be subject to VAT at 15%.  Clearly the level of the fee in question will dictate whether the outright saving will outweigh the cash flow disadvantage.

In-house Recruiters 

In-house recruiters may engage agencies to assist in identifying suitable candidates.  If the in-house recruiter is employed by a business or organisation that cannot recover in full the VAT it is charged, he/she should communicate with the agency to ensure, where possible, that fees are invoiced at the lowest VAT rate, as per the guidance above.

Action

Agencies need to act quickly to ensure that their systems are ready for the rate change. There will be a number of considerations when deciding whether to elect to apply the 15% rate, where this is an option, both in terms of cash flow and absolute VAT savings for clients.  Specialist VAT advice is recommended.