Adecco v HMRC: Legal update on VAT payable for temporary workers

This argument was supported by the similar case of Reed

We are aware that a lot of our clients have received letters from their clients regarding claims for VAT. With recent developments in this area it is important for recruitment businesses to understand the latest position.

In 2009 HMRC withdrew the Staff Hire Concession which allowed employment companies to choose just to charge VAT on their margin. However, they are now expected to charge VAT on the full amount of what they charge clients which increases the costs of staffing significantly.

The issue therefore has important financial implications for the temporary labour market and for any organisations using temporary workers where they are unable to fully recover VAT such as; banks, insurers, some education establishments, charities and healthcare providers.

Facts of the case

Adecco attempted to challenge the withdrawal of the Staff Hire Concession and secure VAT refunds for Adecco which would be refunded to the relevant clients.

This case concerned non-employed temporary workers (workers not obliged to accept assignments offered and where a staffing company is not obliged to find them assignments). Their main argument was that these temporary workers supply their services to the client because the recruitment business has no control over them on assignment. They maintained that the only thing they provided was an introductory service and it is only on that which VAT should be payable.

This argument was supported by the similar case of Reed. In this case it was held that the main consideration in ascertaining the nature of the supply is by considering what in’ economic reality’ has been supplied. Therefore, for there to be a supply of staff, the supplier would need to have exercised some control over the staff which was not the case. As a consequence, Reed was subject to VAT on its commission for introductory services only rather than on the full amount invoiced to clients.


The tribunal held that VAT should be charged on the full cost of the supply. This includes introductory costs and the cost of the temporary worker’s time. The decision was based upon the fact that the temporary workers agreed with the employment business to do the work for the hirer and this agreement was a supply by the worker to the employment agency for which the agency paid. The hirer only paid the employment company. So whilst they benefited from the temporary workers work, they could not be treated as supplying their services to the hirer.

Future implications

This is only a First Tier Tribunal decision therefore it is likely that it will be appealed, not least because the case of Reed was successful on similar facts. In light of the differing decisions the Tribunal in Adecco acknowledged that Adecco will no doubt appeal and a higher authority will clarify the VAT obligations of an employment business.

Any agencies filing claims with HMRC will have to await the outcome of any future appeal. In the meantime, the HMRC position remains the same and VAT is payable on the full amount charged to clients.

By Simon Whitehead, Partner at HRC Law

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