Recruitment agencies supplying temporary staff have begun to charge VAT on the margin rather than the full amount of their invoices, following a tax tribunal decision earlier this year.

However, they face significant financial risks, including being liable for any VAT that they should have charged, if HMRC subsequently decides they were wrong to do so, according to recruitment industry advisers.

In March, a tier one tax tribunal accepted Reed Employment’s argument that it could charge VAT on the margin rather than on the whole value of its invoices.

If implemented this would save Reed’s clients significant amounts of money.

Ian Carpenter, VAT partner at accountants Baker Tilly, told Recruiter: “We are aware that some agencies have adjusted their VAT accounting and are only applying VAT on the margin.”

Kevin Barrow, a partner at Osborne Clark, added: “It’s anecdotal, but we are seeing lots of it.” Barrow claimed that agencies were “being forced or encouraged” by their clients to charge them on the margin only.

He added that this was especially the case in health and social care, one of a number of sectors, where along with the charity sector, financial services, and housing, clients have been unable to reclaim VAT on the cost of temporary staff since the abolition of the VAT Staff Hire Concession in 2009.

However, in a statement issued to Recruiter, HMRC sugested that agencies may have acted prematurely, and that the Reed tribunal decision did not have a wider impact.

“Reed is a judgment of the first-tier tribunal and as such is only binding on the parties to the appeal.” It also conflicted with an earlier tribunal judgement, said HMRC.

“HMRC therefore does not regard Reed as having any wider impact, particularly in relation to the VAT treatment that should apply to employment bureaux operating in the current market conditions and regulatory regime.” The statement continued: “HMRC will shortly be issuing a Revenue & Customs Brief to this effect.”

We will be monitoring this case closely, particularly with respect to any appeal or futher action by Reed/HMRC and will be actively reviewing this case

Carpenter said agencies were faced with a dilemma of either matching the actions of their competitors by charging only on the margin, or being undercut by them. “It’s a difficult decision when some of your competitors have stopped charging on the full amount,” he said.

And Barrow, warned that those agencies who decided to charge only on the margin faced significant risks

“If a staffing company doesn’t charge VAT in full and then HMRC says they should have, then the staffing company will be liable for the VAT.” Agencies could also face penalty of up to 30% of the VAT involved added Carpenter.

Carpenter advised agencies to first seek a ruling from HMRC before switching to charging on the margin only.

Rory White, owner and director of charity Recruiter Flow Caritas, told Recruiter that because of the risk, he had decided not to charge on the margin only. “We have been advised it is too early, and we are waiting to see what HMRC has to say, after which we will seek advice again.

Debbie Reeves-Malvagni, head of resourcing service and delivery at Santander, told Recruiter: “An opportunity to reduce costs is naturally one Santander will pursue…

”We will be monitoring this case closely particularly with respect to any appeal or further action by Reed / HMRC and will be actively reviewing this case with our suppliers of temporary staff. We are due to review matters again in September.”