Nowadays, with the complexity of pension auto-enrolment, RTI and other compliance requirements, it is quite common for one company within a group to act as a payroll bureau and to run the payroll on behalf of a number of related companies. However, do be careful as you might be under declaring VAT.
Whilst the employees’ salary costs, such as wages, PAYE, pension etc., do not attract VAT themselves, VAT could be due when they are recharged to related companies. So, what can you do to ensure that your employment contracts are set up correctly to avoid incurring VAT?
VAT treatment of employees’ salary costs when recharged between UK companies
There can be range of reasons why an employee’s salary would be recharged, but two questions are key to establishing whether VAT is payable:-
- Who is the employer of the individual?
- Is a supply of either staff or services being made?
Establish who is the legal employer of the staff member?
Generally, the legal employer is the named entity on the contract of employment rather than the company which manages the individual’s work on a day-to-day basis – and it is the legal employer who is responsible for the employee’s wages. If, the employee’s wages are paid by another company, the VAT treatment for these recharged salary costs are as follows:-
- The supplier is the employer
When a company has made its own employees available to the recipient, the VAT treatment of the recharge will depend upon whether there is a supply of staff or a supply of services (see next section). - The recipient is the employer
When the recipient is the employer, the supplier has settled a liability of the recipient and the recharge of the wages cost is a disbursement and therefore does not bear VAT.
Supply of staff or services?
If the supplier is the legal employer of the staff, it should be established whether a supply of services or a supply of staff has been made. If a supply of staff has been made, the standard rate of VAT would apply. If a supply of services had been made, the VAT liability would depend on the exact nature of these services.
- Supply of staff
This is where the recipient company is responsible for directing the staff member’s time and the standard rate of VAT should be applied. - Supply of services
This is where the supplier is responsible for directing the staff member’s time and the VAT liability would be based on the type of services provided.
This distinction, whether the supply of staff or services has been made, is important where the services might be zero-rated, exempt or when determining whether or not the supply is made in the UK.
How do these rules apply to Group companies?
When there is a centralised payroll function within a group, there are usually one of two scenarios:-
- The Group payroll company processes salary costs for all staff, who are employed by the individual companies within the group
All staff work for their legal employer, but to save on administration costs, all payroll is processed by the central payroll company. The central payroll company would recharge the salary costs of each staff member to the employer. In this instance, the recharged salary costs are regarded as a disbursement and would not attract VAT. - One group company employs the staff and recharges the wage costs
This is where the group company is the legal employer and its employees are available to work for other companies within the group. In this situation, the recharge is consideration for the supply of services and the VAT liability would depend on the nature of the services being provided.
What about “shared” employees?
When an employee’s time is shared with a number of related companies within a group, the same rules apply – who is the employer (i.e. on the employment contract) and who manages the employee’s work on a day-to-day basis?
- Supply of services
If the service supplied is part of the group overhead function, such as a share of the HR function or facilities management, this will be regarded as a supply of service, even though the costs charged might be based on an employee’s salary. The VAT treatment would depend on the type of service provided, but generally would be at the standard rate. - Supply of staff
If the member of staff is under the direction of another company, this would be considered as the supply of staff and would be subject to VAT.
VAT planning opportunities?
There are three steps that could be taken to avoid VAT on recharged salary costs:-
- VAT groups
All supplies, including supply of staff, between a VAT group are disregarded for VAT purposes. - Joint employment contracts
Where an employee is employed by more than one entity, any wages recharged are outside the scope of VAT. - Temporary suspension of employment contract
Where an employee is seconded to another company the employment contract can be suspended for the duration. This will need to be properly documented, to the satisfaction of HMRC.
The application of VAT rules can be complex, so please do seek professional advice before taking any steps to mitigate VAT on recharged salary costs.. If you would like to discuss payroll and VAT in your business, please do get in touch with our team of payroll specialists at DRG Chartered Accountants. We would be delighted to hear from you.
For further information
HMRC Guidance. Supply of staff and staff bureaux (VAT Notice 700/34)
DISCLAIMER: This information is for guidance only, and professional advice should be obtained before acting on any information contained herein. We will not accept any responsibility for loss to any person as a result of action taken or refrained from in consequence of the contents of this publication.
