The VAT Trap of Joint Employment Explained

In a time of rising service charges and cost-conscious leaseholders, it’s no surprise that managing agents, RMCs and RTM companies are looking for ways to make service charge budgets stretch further. But at Cledor, we’re concerned by one tactic being pushed in the industry: the use of joint employment arrangements to avoid VAT on the cost of on-site staff.

These schemes are marketed as a way to save 20% VAT — but they may come at a much higher price if HMRC decides the arrangement doesn’t hold up.

Who are the parties involved in joint employment schemes?

Typically, joint employment arrangements are proposed between:

A staffing provider (usually VAT-registered),
And either a managing agent, Resident Management Company (RMC), Right to Manage (RTM) company, or in some cases the freeholder.

The theory is that if both parties are named in the employment contract as joint employers of on-site staff – for example, concierges, caretakers or cleaners – then the arrangement falls outside the scope of VAT. This position is based on HMRC VAT Notice 700/34, which states that no VAT is due where staff are genuinely jointly employed. (GOV.UK, FCSA)

But there’s the catch: HMRC expects genuine joint control and shared responsibility – not just names on paper. (GOV.UK)

What does HMRC expect in a genuine joint employment setup?

To qualify, both parties must:

Be jointly and severally responsible as employers,
Share decisions on hiring, discipline, training and performance,
Together handle holiday, sick pay, payroll and appraisals, and
Actively manage the staff on a day-to-day basis.

In practice, very few RMCs or RTMs have the resources or desire to take on this level of involvement and that’s why the managing agent’s or personnel provider’s supporting roles are necessary and vital. And of course, there is a fee associated with the work the agent or personnel provider does for the RMC/RTM/freeholder.

The reality with illegitimate joint employment arrangements is often that the staffing provider does everything, while the other party is named simply to create a VAT-free façade. This is precisely the kind of arrangement HMRC is likely to challenge – and when it does, it can recover backdated VAT, interest and penalties.

Can you ask HMRC for clearance in advance?

Yes – and we recommend doing so. You can apply to HMRC for non-statutory clearance, describing the arrangement in full. Without this, you’re relying on interpretation – and tax schemes that lean too far toward avoidance don’t get much sympathy.

What’s the safest option?

The most robust way to avoid VAT on the direct cost of staff is for the client to employ the staff directly. In that case, there’s no “supply” and no VAT due — just the landlord/RMC/RTM carrying out their lease obligations.

And the members of staff themselves?

What’s more troubling is how little attention is paid to the experience of the on-site employees themselves. Glossy brochures promoting joint employment say nothing about the people whose employment contracts are being torn up and reissued in the name of tax efficiency. One day the employee has a clear employer, familiar terms, and a known management structure. The next, they’re handed a P45, a brand-new contract listing two employers and expected to adjust without question. The administrative burden, legal implications and emotional impact are brushed aside – not to mention the confusion over who now handles their appraisals, sickness, training and grievances. These employees are not pawns in a VAT-saving exercise.

At Cledor, we believe in keeping things simple, transparent and compliant. If something sounds like a tax loophole, it probably is – and we’d rather help you avoid the trap entirely.

Nick Regnier (nick@cledor.co.uk)