The health sector clients of Hertfordshire-based CTS Recruitment have successfully fought off a VAT bill of £250,000 after being misdirected by HM Revenue & Customs.

HMRC is currently reviewing the issue of VAT on staff supplied through agencies (Recruiter, 18 October 2006). At present, VAT is only payable on the agency's commission. However, CTS had not been charging VAT, even on the margin, to some clients. Confusion had arisen on the question of whether it was healthcare staff or healthcare services that were being provided.

CTS, founded in 1983 by Chris Graham, has been placing NHS staff since 1987. Graham told Recruiter: "It was a real saga. I wrote to the tax authorities about 13 times." Graham added that he knew of other agencies that were still not applying VAT to their margins. "We're now at a disadvantage," he said.

VAT consultant Debra Dougal of accountancy firm Haslers mounted a case to show that the client had been misdirected, with the result that HMRC withdrew its assessment and committed to not seeking recovery of any VAT from the client for the period in question.

Dougal said: "Misdirection, whether by act or omission, is covered by Extra Statutory Concession, which means that Customs has the right to accept or refuse appeals on this basis without the further right of appeal to the VAT Tribunal. Any misdirection case must therefore be presented in the strongest and most compelling way to achieve any success."

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