UK Paymaster Concession Can Mean VAT Complexity for Companies

For businesses registered for value-added tax in the UK, a key concern is whether VAT needs to be added to the supplies they make. Where applicable, VAT is charged at each stage of a supply chain from initial development through to the end consumer. It can apply not only to physical products but also services, including supplies of staff.

In general, any supply of staff for a consideration (that is, payment) is subject to UK VAT at the standard rate of 20% when supplied in the UK. Payment can be monetary or non-monetary. This can lead to additional and unexpected costs, especially where charges are made between members of a corporate group—as the members are separate legal entities for UK VAT purposes.

However, there are exceptions and concessions to the general position. The paymaster services concession is one that specifically relates to the supply of staff.

Paymaster is a concession whereby VAT doesn’t need to be accounted for on certain recharges of staff costs. Its operation takes the recharges out of the scope of the tax—effectively an exception to the default position of UK VAT at the current standard rate of 20% needing to be accounted for.

The paymaster concession has existed for a number of years, so it’s considered a well-trodden path for many. However, Crowe’s team has noted an increase in queries around the complexities of its operation. The triggers for recent queries have included a corporate group restructure where there’s a change to the entity engaging the individual; a refresh of contracts; or a response to the UK tax authority, HM Revenue & Customs, questioning the VAT position.

A Supply of Staff

A supply of staff is made when an individual who’s contractually employed or otherwise engaged is provided to another organization in exchange for any form of consideration.

The most important requirement is that the individual isn’t contractually employed by the recipient but would come under the recipient’s day-to-day direction and operational control (how the individual performs their work).

This position changes in specific circumstances, and one of these is paymaster services.

Paymaster services can occur between two associated companies where one company pays the salaries, national insurance and pension contributions (among other services) in these situations:

• Jointly employed individuals—one company pays the salaries which it recovers from the other joint employers.
• Each of a number of associated companies employs its own staff, but one company takes on the role of the paymaster and pays the salaries on behalf of the others, and they each pay their share of the cost to the paymaster.

Should VAT Be Charged?

In both the above situations, the recovery of costs from the joint employers/associated companies (as relevant) is a disbursement for UK VAT purposes and therefore outside the scope of UK VAT.

However, charges made for the following will be subject to UK VAT:

• Fees that are over and above a simple reimbursement of staff costs.
• Any fee that is charged by the joint employer (responsible for paying the salary) or the paymaster for arranging payment of the reimbursed costs.

It’s important to ensure the VAT treatment of supplies made is correct, as this can have implications for both the supplier and the recipient of the services.

If VAT has been charged incorrectly. As output tax (VAT on sales) has been incorrectly charged any amounts described as “VAT” can’t be reclaimed as input tax (VAT on purchases) by the recipient. The invoicing position will need to be corrected. A review will need to be undertaken of all similar supplies to correct the position with HMRC. The recipient of the service would have reclaimed too much input tax and will need to carry out a similar review with a view to correcting the position with HMRC.

If VAT hasn’t been charged but should have been. Again, the position will have to be corrected and a review undertaken to ensure that the right amount of VAT is paid to HMRC. The contractual agreements will need to be reviewed to ensure that this allows for VAT to be charged in addition to the value of the services provided.

Other Points to Consider

There’s often a lack of formality in intercompany arrangements, as organizations frequently don’t prioritize documenting their internal arrangements. This can be the case with paymaster services arrangements and can be detrimental, as HMRC will normally ask to review the underlying contracts and written documentation when reviewing the VAT position. It’s important that there are contracts and intercompany documents in place that reflect what is happening in practice.

We also recommend a periodic review to ensure that internal processes are aligned with the written documentation in place. An internal reorganization leading to the transfer of employees from one group company to another should also be a trigger to review the appropriateness of paymaster treatment.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Robert Marchant is partner, VAT and customs duty services with Crowe.

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