VAT and On-Site Staff
The Background
First published in 2018. Reviewed and updated, March 2023.
Over the course of years in the lead-up to the HMRC’s guidance on the correct application of VAT on residential service charges, and subsequent to its release in September 2018, there has been much debate amongst managing agents, landlords/freeholders and providers of on-site staff.
Many managing agents across the country were employing on-site staff for clients’ residential schemes, yet they were not charging VAT on the cost of their provision. Relying on a VAT concession incorrectly applied, they immediately gained a 20% cost advantage over their competitors who were recharging the cost of staff with VAT included.
Whilst this was great for the leaseholders in the short term (as they were paying 20% less than they might have been), tax experts were telling managing agents and their clients that VAT must be applied and that HMRC might come after them at some point for years of unpaid tax. A 2015 Upper Tribunal Case ought to have made it clear to those managing agents yet it took three years for HMRC to provide the clarity needed.
On receipt of the advice taken (including reference to the Upper Tribunal determination), most managing agents did the right thing and explained to their clients that going forward VAT at 20% would need to be applied to the cost of staff provision.
Managing agents also offered an alternative to their clients, removing the need to charge VAT on the staff salaries, but the employment of the staff would have to move from the agent to the client.
So clients (i.e. RMCs/freeholders) were faced with three main choices:
To instruct their managing agent to ignore the advice and continue employing the staff with no VAT applied to their cost.
To accept the advice and ask the managing agent to increase the staff cost in the budget by 20%.
To arrange ‘TUPE’ of the staff from the managing agent’s employ directly to their own employment.
Naturally, there are other implications in the choices that are not discussed here (such as liability issues associated with being an employer) but essentially the options were clear-cut.
HMRC Guidance September 2018
Then the September 2018 guidance is released which confirmed that if a managing agent (or recruitment agent) employs the staff and supplies them to the landlord directly or indirectly, a standard rate VAT of 20% is to be charged.
The guidance essentially delivered the message that the only tangible and legal solution for any landlord to avoid standard VAT on the supply of staff would be to employ staff directly.
HRMC Guidance - Our Take
The ‘best’ option, therefore, is to ask the client to become the employer, with the managing agent or personnel company continuing to process the payroll. Employment contracts would need to reflect a change of employer and TUPE would be applicable for this change to take effect.
However, this ‘best’ option needs some qualification. This is because the definition of ‘landlord’ in HMRC’s guidance does not include RMCs. In fact, RMCs are treated as if they were a managing agent or a personnel provider like Cledor.
ARMA, IRPM, accountants in the sector and other commentators concur that VAT is not applicable as long as the employer of the on-site staff is also a person/company that owns an interest in the property that it can grant to someone else.
That ‘interest’ in the property is by way of the freehold or the head lease, so a freeholder or head leaseholder is able to grant a lease or tenancy or take the lease/tenancy back upon forfeiture).
An RMC that does NOT own an interest in the property cannot claim access to the extra-statutory concession paragraph 3.18 detailed in HMRC’s VAT Notice 48 which is about VAT exemption from domestic service charges.
Thus an RMC that does not own a head lease or freehold yet has an obligation to employ on-site staff, may well need to become VAT registered and apply VAT to the on-site staff costs.
HMRC sees the RMC as providing on-site staff to the freeholder and is therefore perceived to be providing a service to which VAT may be applicable. We say ‘may’, because if the cost of the staff is below the VAT threshold which is currently £85,000, then the RMC does not need to become VAT registered.
Let’s look at some examples for clarity:
EXAMPLE 1
A freeholder* employs four on-site staff for a residential scheme. The total wage roll is £100,000. The freeholder’s managing agent deals with the payroll which they do as part of their management fee. In this case, VAT is not applicable to the salaries, so the leaseholders are paying their contribution to the salaries without VAT being added. The freeholder is the landlord who is employing service charge recoverable staff – a cost to it – that is recharged to the leaseholders.
(*could also be a headleaseholder)
EXAMPLE 2
A managing agent that is VAT registered employs one member of on-site staff, a concierge, for a residential scheme. The concierge is paid £30,000 per annum and the total cost of employing the concierge including employer’s National Insurance contributions is paid by the leaseholders via the service charge.
As the managing agent is the employer of the service charge recoverable staff and the cost of him is incurred in providing a service to the landlord, the agent’s recovery of this cost is subject to VAT at 20%. In other words, the managing agent is obliged to charge VAT on the cost of providing this concierge.
EXAMPLE 3
An RMC in a tripartite lease (i.e. freeholder + RMC + leaseholder) is obliged under the terms of the lease to employ on-site staff consisting of two cleaners, two concierge and an estate manager. The staff are employed in the name of the RMC and the managing agent (acting for the RMC) processes the payroll. The staff wages total £150,000.
The RMC is obliged to apply VAT to the £150,000 wage roll because (1) the RMC is providing a service to the freeholder (provision of staff), (2) the RMC does not own an interest in the land, (3) the wage roll is above the VAT threshold of £85,000.
Had the wage roll been under £85,000, VAT would not need to be applied to the staff salaries.
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Below the VAT threshold of £85,000, there is no necessity for the RMC or RTM to apply VAT to the on-site staff salaries. So for sites with a total payroll cost below £85,000, there is nothing to worry about in this respect.
However, above £85,000, the situation changes. As the RMC or RTM does not own an interest in the property, VAT must be applied to the cost of the staff, so the RMC or RTM is, therefore, required to be VAT registered. In being VAT registered, the RMC/RTM will then need to account for VAT generally. This includes recovering VAT from any services it procures – e.g. from the managing agent’s fees which are subject to VAT.
Of course, if an RMC is the on-site staff employer and owns the head lease or indeed the freehold (share-of-freehold), then the RMC fits the HMRC description of ‘landlord’ and does not need to charge VAT on staff salaries. In other words, the landlord is making use of its own resources so the staff wages would not be a taxable supply.
Remember that when VAT is applied, the total cost of the staff includes National Insurance contributions, pension contributions and benefits, in addition to the salary/salaries. So a total salary of £80,000 will likely exceed the £85,000 threshold when NICs and pension contributions are included. (VAT would not ordinarily be added to on-site staff accommodation costs or training).
EXAMPLE 4
A freeholder of a block of flats is an employer of three members of on-site staff with a total wage roll of £90,000. The freeholder wishes to appoint a new managing agent. The outgoing managing agent deals with the management of the staff and the payroll.
The freeholder duly appoints a new managing agent and asks the new agent to deal with the TUPE of the site staff to the managing agent’s own employment, as it has decided it does not want to have the liability of employing staff. The managing agent warns the freeholder that it (the agent) would be obliged to charge VAT at 20% on most of the staff costs, which would make the cost of providing the staff around 20% more expensive to the leaseholders. The freeholder – keen to keep the leaseholders on side – asks the managing agent to explore ways of avoiding the 20% hike.
The managing agent duly does so and concludes the best way of preventing the ‘hike’ is for the freeholder to continue employing the staff.
Alternatively, the managing agent suggests that the freeholder continues to be the employer but engages a third-party HR/personnel company to manage the payroll, deal with annual leave and absence, and generally take over the responsibility for managing the staff. That way they can limit their liability although they will be incurring fees for the HR company’s services and those costs would be passed to the leaseholders via the service charge.
Thirdly, they suggest that the freeholder looks at the possibility of joint employment: the notion that the managing agent for the site AND a third-party personnel provider jointly employ the on-site team. The main driver for joint employment is to avoid VAT on staff salaries, by providing a route to limit the amount of VAT that the leaseholders are obliged to pay via the service charge. This is a risky path in our view – see the last section of this article, ‘Cledor and Joint Employment’.
Cledor and VAT
Cledor provides a range of services to the residential and commercial property management sectors, all of which are subject to VAT at 20%. When it comes to the provision and engagement of on-site staff, as you can see from here, Cledor provides a number of options. Each has VAT implications as below.
1. HOLISTIC MANAGEMENT
For our holistic management option where we look after all elements for you, VAT is applicable on all elements of our invoice. Very straightforward.
WE SOURCE
WE PLACE
WE EMPLOY
WE PAY
WE MANAGE
WE TRAIN
VAT IS APPLICABLE ON ALL STAFF COSTS
2. PERMANENT PLACEMENT
Our role here is to find the staff for you, make sure they are settled in, then you employ and manage then. VAT is applicable only on our permanent placement fee. As the managing agent, if you employ the staff, you will be obliged to apply VAT to the total staff costs – i.e. their salary will be subject to VAT. If YOUR client (the landlord who is either freeholder or leaseholder) employs the staff, then VAT would not be applied to the salary cost.
WE SOURCE
WE PLACE
YOU EMPLOY*
YOU PAY
VAT IS ONLY APPLICABLE TO THE PLACEMENT FEE
3. TEMPORARY PLACEMENT
For providing temporary on-site staff, VAT is applicable on all elements of our invoice, as you would expect.
OUR STAFF
WE TRAIN
WE PLACE
WE MANAGE
WE PAY
VAT IS APPLICABLE ON ALL STAFF COSTS
4. TAILORED MANAGEMENT
Our tailored management option means VAT is only applied to our fee. When we source the staff for your site, there is NO permanent placement fee applicable. The staff will be for YOU to employ as the managing agent (VAT applicable) or for your client, the landlord (freeholder or leaseholder), to employ (no VAT applicable).
WE SOURCE
WE PLACE
WE MANAGE
WE TRAIN
YOU EMPLOY*
YOU PAY
VAT IS ONLY APPLICABLE TO OUR FEE
Cledor and Joint Employment
Compliance with employment law and the tax authorities is of utmost importance at Cledor. We will never knowingly place a managing agent or a landlord at risk of accruing a tax liability.
Cledor will not consider the application of joint employment which is where a member of on-site staff has two employers simultaneously. Typically, joint employment contracts in the property management sector are between a personnel provider and an RMC, RTM, Head leaseholder or freeholder, or alternatively between a personnel provider and the managing agent.
The managing agent and their client contemplating joint employment of site staff must do so having reviewed the eligibility of such an arrangement and associated risks, particularly in respect of the HMRC and their aversion to VAT avoidance. If the HMRC disagrees with the eligibility of a joint employment arrangement, they may request backdated VAT at the prevailing rates over the period of perceived ineligibility – plus penalties.
FOR ANY ENQUIRIES ABOUT VAT AND ON-SITE STAFF PROVISION, PLEASE CONTACT US AND WE’LL PROVIDE THE CLARITY YOU NEED TO MAKE AN INFORMED DECISION.
Please go to HMRC’s website for up-to-date information regarding VAT.