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HMRC internal manual

VAT Taxable Person Manual

Particular trades: employment bureaux including nursing agencies: how to decide

Determining which of the four supply situations applies to your bureau is largely a matter of checking for inconsistency, rather than an exercise in meticulously weighing up the facts. There are occasions when tribunals have looked at very similar facts, and have found that they demonstrate differing situations; thus reaching contrary decisions where the details of a case are similar. The best approach is therefore to look at the fullest possible range of documentation as well as the business’s working practices, and then check whether the trader’s view of the relationship is consistently reflected. If the trader’s view is consistently supported across the range of documentation, and is confirmed in his day-to-day operations, it will be difficult to oppose.

You need to proceed in a methodical manner, as follows.

  • First, ask the trader whether he considers himself to be agent or principal, and - if he considers himself to be an agent - whether he is agent for the client, the worker, or both.
  • Then build up a package of documentation as listed at VTAXPER67300, paying particular attention to the documents between the worker and the trader.
  • Having identified which of the four situations your trader considers applies, consult a. to d. below, where we give broad indicators of each of the four situations. Confirm whether in broad terms, the package of information reflects the situation which you have identified.
  • Finally, check whether the trader’s working practices remain consistent with the practices reflected in the documentation.

a. Bureau acts as principal

This is the only situation in which there is a continuing contractual relationship between bureau and worker. Therefore, the agreement between bureau and worker will stress this continuing contractual relationship, and will specify the wage rates to be paid to the worker. This relationship will be reflected in both the promotional literature - which may use terms such as ‘our staff’ - and the agreement between bureau and client. The client will be charged an overall sum by the bureau, and will thus not be aware of what proportion of this charge is retained by the worker.

An example of this situation is the Tribunal of M G Parkinson (LON/90/1083Y), a full summary of which is available on the computerised Tribunal Record. This summary brings out a number of pointers which are indicative of the bureau supplying staff as principal.

b. The bureau acts as agent for the client

If the bureau acts as agent for the client, the only document prepared for the worker’s benefit will be one by which control is passed over to the client. After that, the bureau will take its introductory fee and, where it has supplied permanent staff, end its involvement. Where it has supplied temporary staff, the bureau will sometimes agree, for the sake of convenience, to pay the wages of the worker on the employer’s behalf.

In this situation, the continuing contractual relationship will be between the bureau and the client. The agreement between these will reflect the arms length relationship between bureau and worker as detailed above. It will make clear that the worker is employed by the client, and that the client must therefore bear all the obligations of an employer. If the bureau has assumed responsibility for paying the worker’s wages, a specific clause of the agreement will make clear that this is a service performed for the employer, not a part of the bureau’s normal responsibilities. All parties - worker, bureau, and employer - must be fully aware of how much is paid to the worker, and how much commission is retained by the bureau. This can be achieved by separately itemising these elements on contracts or invoices - but itemisation is not, on its own, proof of agency, and a bureau cannot become an agent simply by itemising its invoice to the client, if the other aspects of its business operation do not reflect this.

c. The bureau acts as agent for the worker

Social legislation prohibits most bureaux from making charges to employees. Nevertheless, some bureaux will claim that this situation applies to them, and where this view is consistently supported across the range of documentation, you must accept it.

The main indicator of this situation is that the continuing contractual relationship is between the bureau and the worker. This should be clearly stated in the agreement between bureau and worker, and reflected in the agreement between bureau and client. The bureau may collect the worker’s wages and deduct its agency commission at source, passing the balance to the worker, but the agreement will clearly state that this is the worker’s money; the bureau is merely acting on his or her behalf. Where commission charges are made, they are of course, consideration for a taxable supply of services by the bureau to the worker (and NOT the client) and are standard-rated. But please read the next sub paragraph.

d. The bureau acts as agent for both the employer and worker

This situation is comparatively rare, but does occur with medical agencies. The indicators to look for will be a combination of those listed at b. and c. above.

A key point in all this is consistency: it is important to ensure that the actions of bureau, worker, and employer remain consistent with what they have agreed in the package of documentation which you have assembled. This is true of any area where agency is at issue; but there is a particular danger in this field, in that bureaux may attempt to draw up agreements which mirror the facts in tribunal cases where an agent/principal relationship was found, in order to create the impression that they have changed their status from principal to agent. Such new agreements will only create a relationship of agent and principal if working practices have changed in step with them. An agency relationship is not created where a trader who acts as principal simply draws up a new agreement without changing his manner of trading.

This was demonstrated in the tribunal of Allied Medicare Nursing Services (MAN/89/484). In this case, a nursing agency which had previously acted as principal in the supply of nurses who were its employees, altered these agreements to give the nurses self-employed status, and claimed now to be acting as their agents. The tribunal rejected this however, finding that working practices had not changed despite the new agreements, and that the trader therefore remained a principal.

In the field of nursing agencies, traders may seek to draw up agreements along the lines of those used in the tribunal and High Court cases where the appellants were found to be acting as agent, notably British Nursing Co-operation Ltd LON/91/1696Y, August 1992 (8816) and Reed Personnel Services Ltd, QB [1995] STC 588. If the contractual arrangements have changed and the working practices of the bureau are not inconsistent with an agency relationship, you should accept that a new relationship has been created.

The case of Reed Personnel Services Ltd, QB [1995] STC 588, established that a trader’s status for VAT purposes is not necessarily determined by the contractual agreements. In this case, the tribunal found that the trader acted as an agent in the placement of nursing staff to its clients - primarily NHS hospitals. Because of the lack of clear evidence of agency in the contracts, we took the view that Reed was supplying nurses as principal.

The High Court however agreed that in this case the written contracts were not determinative of the issue and the tribunal was correct to step outside the contracts and look at all aspect of the trader’s operation in reaching a conclusion. Since the tribunal’s finding had been one of fact there was no basis for the High Court to interfere and our appeal failed. In his judgement, Justice Laws observed that, although the contractual documents set out the rights and obligations of the parties concerned in private law, they do not necessarily establish the VAT position. This can only be ascertained by examining the whole facts of the case.

Some traders and their representatives may seek to argue that the Reed decision (especially when viewed with earlier cases where the tribunals have found against Customs and Excise) means that all nursing agencies, or even all employment bureaux, must be acting as agents. This is not a conclusion which we accept. The approach established by the High Court judgement in Reed confirms that each case must be decided on its own merits. However, the outcome of recent appeals does demonstrate that it is open to an employment business to organise its affairs so as to operate either as a principal or as an agent. This will be a matter of commercial judgement for the business concerned and, provided the contractual arrangements and method of operation are compatible with the status claimed, we should accept the traders view.

Agreement with the Federation of Recruitment and Employment Services (FRES)

HMRC agreed with FRES the terms of two agreement modules (comprising the agreement between the employment business and the client who needs the work done, and the terms and conditions between the employment business and the worker) which, together, may be used by members wishing to act as agents. These were issued by FRES with its August 1995 membership circular which sets out the legal ramifications for employment businesses of acting as principal or agent. It also advises how the working practices of the members should support their chosen method of operation in a given contractual situation.

(This content has been withheld because of exemptions in the Freedom of Information Act 2000)

  • (This content has been withheld because of exemptions in the Freedom of Information Act 2000) VTAXPER67600(This content has been withheld because of exemptions in the Freedom of Information Act 2000)
  • (This content has been withheld because of exemptions in the Freedom of Information Act 2000) VTAXPER67700(This content has been withheld because of exemptions in the Freedom of Information Act 2000)
  • (This content has been withheld because of exemptions in the Freedom of Information Act 2000) VTAXPER67800(This content has been withheld because of exemptions in the Freedom of Information Act 2000)