VAT and On-Site Staff
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 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 explained to their clients that there was a way to save the VAT 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 expert tax advice and continue providing 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 suppliers them to the landlord directly or indirectly, standard rate VAT is to be charged.
The only tangible and legal solution for any landlord to avoid standard VAT on supply of staff, would be to employ staff directly. If this is the case, then the managing agent can still process the payroll as long as the employer’s name is clearly shown on the payslip. Employment contracts would need to reflect change of employer and TUPE would be applicable for this change to take effect.
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.
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) employs the staff, then VAT would not be applied to the salary cost.
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. Very straightforward.
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, to employ (no VAT applicable).
VAT IS ONLY APPLICABLE TO OUR FEE
Why Cledor doesn’t do Joint Employment
Having taken expert advise from accountants and human resources professionals, Cledor is of the opinion that the use of joint employment – where a member of on-site staff has TWO employers at the same time – to avoid paying standard rate VAT on staff salaries, amounts to misuse and was not the intention of the legislation.
Cledor is aware of managing agents that fulfil the function of employer of the on-site staff whilst their client (landlord/RMC/freeholder) is also the employer. That means there needs to be a sharing of the employment responsibilities to justify the joint employment set-up.
Cledor is also aware of recruitment companies jointly employing on-site staff with the landlord simply to avoid VAT. Such recruitment companies seek to do 100% of the management of the staff thus it’s difficult to see how there is a sharing of employment duties.
In neither of the above joint employment examples can we see a legitimate reason for joint employment, other than to avoid VAT. The simplest and easiest solution – if VAT is to be avoided – is to convince the client (landlord/RMC/freeholder) to be the sole employer and the managing agent (or a company like Cledor) charges a fee for their management.
A member of on-site staff with two employers rather than one is likely to cause confusion when seeking instructions or where there are performance issues or a grievance, even if the employment contract is sufficiently detailed to cater for every conceivable situation.
If HMRC concludes that the use of joint employment in managing agent circles is simply a ruse to avoid VAT, then that ‘loophole’ will be closed by the issuing of further guidance or even retrospective VAT charges which would be particularly unpalatable for service charge paying leaseholders.