HMRC internal manual

VAT Taxable Person Manual

VTAXPER67400 - Particular trades: employment bureaux: specific circumstances

Personal Service Companies

Workers sometimes provide their services through a limited company, of which they are the sole director.  This company is termed a ‘Personal Service Company’ (PSC).  

We do not consider that engaging a worker via a PSC alters the VAT treatment of a supply by an employment bureau.  Where a PSC supplies the services of an individual to the bureau, that bureau is acting as a principal in receiving and making a supply of staff as it engages the PSC to make its onward supply to the client. Conversely, where a PSC supplies the services of an individual to the client the bureau is providing introductory services.

‘Direct engagement’ schemes/models

The term ”direct engagement” is relatively new. Here the client directly engages the worker, or their PSC (with no other party, e.g. an umbrella company, interposed in the chain) and a separate third party, usually unconnected with the bureau, provides payroll and administrative support to the client. Thus, the bureau sources workers for the client in an agency capacity.

This is why the term ‘direct engagement’ has been coined. However, it has no specific or legal meaning and there is a risk of confusion if a business or its advisor use this term to describe any other arrangements.  You should therefore view it as simply a convenient shorthand for the arrangements described in this section and not attach much weight to the term itself.

Unlike in traditional agency arrangements the following factors can be present:

·        A contract between the worker and the bureau, which is suspended for the

         duration of an assignment under a direct engagement scheme

·        Short assignments, sometimes as little as one week, or even one shift

·        Ongoing payments by the client to the bureau rather than a one-off fee, on the basis of

         the worker’s hourly/daily rate. Payments would not include workers’ wages etc.

Direct engagement schemes have not affected our policy.   If the contracts and economic reality lead to agency treatment then, providing the arrangements are properly implemented, that is the correct VAT analysis.  

Direct engagement is most often seen in the NHS, specifically in the supply of locum doctors, where Trusts/Health Boards are unable to recover VAT charged on the supply of these workers under the Contracted out Services rules https://www.gov.uk/hmrc-internal-manuals/vat-government-and-public-bodies/vatgpb10550.  However, the IR35 Off-payroll working rules introduced in April 2017 for public authorities have made it less common for locums to operate through PSCs, so their use may decline in this sector.  

Direct engagement models may have a significant online aspect e.g. for signing contracts and submitting timesheets, or have a more physical presence, e.g. scheme provider staff located in hospitals.  The specifics will form part of the factual matrix surrounding the actual model in question.

We accept that the bureau is acting as an agent rather than a principal where it is clear from the contractual arrangements and other supporting evidence and facts that the worker (or the worker’s PSC) is genuinely engaged directly by the client.  The length of the assignment in itself will not determine of the VAT treatment.

The facts of each case will differ, but the following are indicators you should look for to confirm a direct engagement by the client, with the bureau acting as an agent:

·        For the specific engagement covered by the scheme, the worker/worker’s PSC has a

         contract directly with the client, not the bureau.

·        There is a contract between the bureau and the client defining the bureau’s role as an     

         agent in respect of directly engaged workers.

·        The bureau makes it clear to the worker that the worker/worker’s PSC is directly

         engaged by the client.

·        The worker is paid by the client from its own funds (often via a third party acting on

         behalf of the client) and is not paid by the bureau or any party connected with it.

·        In the case of individuals, the client is the employer of the worker and takes on PAYE

         and NIC obligations where appropriate.  Where the worker provides services through a

         PSC, the PSC may be responsible for the worker’s PAYE and NICs.   However, from 6

         April 2017 changes to the direct tax position meant that for public sector clients the

         client can become responsible.

·        The remuneration received by the bureau from the client reflects the fact that it is only

         supplying an introductory service.  The remuneration may be received on an ongoing

         basis rather than a one-off fee to reflect short, multiple assignments and the regular  

         checks the bureau makes for the client on the worker’s ongoing suitability, e.g. up-to-

         date qualifications and appropriate clearance for the assignment.  

When reviewing the activities of an employment bureau providing workers through a direct engagement scheme you should ensure that the documents you see and information you gather are consistent with the bureau acting as an agent for the client and the client directly engaging the worker for the assignments in question.

It is possible for an employment bureau to introduce the same worker to some clients on an agency basis through direct engagement, and to supply the worker to other clients as a traditional employment business, hence the ongoing contact between the worker and bureau.

It is essential that any direct engagement model is correctly implemented.  In particular, any existing arrangements under which an employment bureau operates as a principal must not be in operation during an agency assignment.  If this is not done, it is possible that the pre-existing contracts remain in force and the employment bureau is acting as a VAT principal in the supply of staff. The onus is on the employment bureau to satisfactorily evidence that they are the agent they claim to be for any given assignment that a worker undertakes.   

Umbrella companies  

An umbrella company is a business that employs temporary workers who work at different clients’ premises. [LINK TO ESM2390].  An umbrella company worker will not be operating through their own PSC.

Typically, there is an employment contract between the worker and the umbrella company, a contract between the umbrella company and the bureau and a contract between the bureau and the client.  As the circumstances of the bureau’s relationship with each of the three parties may differ from case to case you will need to look at the contractual relationships and the facts to decide whether your bureau is acting as an agent or principal.

An individual employed by an umbrella company cannot also be employed by the client under a direct engagement scheme.  In other words, the worker cannot be directly engaged by the client given he/she is already employed by another entity for that work – the umbrella company.  However, where an individual is an employee of his/her own PSC, that PSC can be engaged by the client in its own right under a direct engagement scheme.  The PSC is the worker’s own intermediary/limited company which he/she works through. 

Nursing Agencies

By an informal concession, nursing agencies (or employment businesses that provide nurses and midwives, as well as other health professionals) may exempt the supply of nursing staff and nursing auxiliaries supplied as a principal to a third party, subject to certain conditions.  See para. 6.5, Notice 701/57: Health Professionals and Pharmaceutical Products.

HGV drivers

There are few hard and fast rules within particular industries. The one exception is the supply of HGV drivers; here the bureau always acts as agent for the client, as there is a legal requirement that the transport operators themselves become the employer.