HM Revenue and Customs could lose hundreds of millions of pounds in tax revenue in following a recent tax tribunal decision involving Reed Employment, according to a VAT tax expert.

On 24 March, a  tax tribunal accepted Reed Employment’s argument that it could charge VAT on the margin rather than on the whole value of its invoices. However, the tribunal refused Reed’s request for a repayment of the amount it had ’overcharged’ in VAT over a number of years as a result charging clients VAT on the full value of invoices rather than on the margin.

Hannah Dobson, VAT director at accountants Smith & Williamson told Recruiter that sources close to HMRC had indicated that HMRC wished to restrict the application of the judgement to Reed, so that unlike Reed other agencies would not be allowed to charge VAT on the margin. “It they [HMRC] were to achieve this, it would be very difficult for anyone to go to the Revenue and ask for VAT that they had overcharged,” she explains.

However, Dobson says it is “going to be hard” for HMRC to restrict the application of the Reed decision only to Reed as you can’t have one rule for one company in an industry and another rule for others.

“If HMRC cannot restrict the application of this ruling to Reed, this opens the door for other agencies to start charging on the margin, and for agency clients to start making claims against their agencies for repyament of overcharged VAT, with the agencies claiming the money back from HMRC,” she says. This could result in HMRC losing hundreds of millions of pounds in tax receipts, she adds.

Dobson says claims are most likely from clients in the medical, health, financial services, and charity sectors, where clients are unable to reclaim VAT in full on their business costs.

In a statement HMRC told Recruiter: ” HMRC is considering the effect of the recent judgment of the First Tier Tribunal in Reed Employment Limited and whether it has any wider implications.”