Upon its introduction, VAT was described as a simple, self-assessing tax. However accurate you may consider this statement to be, it certainly doesn’t capture the fact that the VAT never sits still for long and current VAT events continue to illustrate this. Current VAT litigation may result in further significant changes to how VAT affects housing associations. A decision in one of the current cases has the potential both to increase and decrease costs materially.
In terms of current case law, two issues stand out, the installation of energy-saving materials and the VAT treatment of temporary staff. There are important steps which can be taken to manage the risk in connection with energy-saving materials and to maximise the chances of realising a repayment in connection with temporary staff; many housing associations are already taking these with KPMG’s assistance.
Installation of energy-saving materials
Unfortunately, the dark cloud of the European Commission’s challenge to the UK’s reduced rate for the installation of energy-saving materials has been lurking on the horizon since the infraction proceedings began in June 2012. The European Commission considers that the UK’s reduced rate of VAT (5%) for the installation of energy-saving materials is ultra vires because it goes beyond the scope of what is permitted within the framework for EU-wide VAT. The case was heard on 26 February 2015 at the Court of Justice of the European Union (CJEU) and will determine whether the UK can retain the current reduced rate for the installation of energy-saving materials. If the UK is unsuccessful in defending its position, then the installation of energy-saving materials is expected to become subject to the standard rate, significantly increasing the cost of these works to many housing associations.
The UK VAT legislation is based on the EU VAT Directive, which sets out a framework for the VAT rules in each member state. The EU VAT Directive includes a list of the supplies to which a reduced rate of VAT may be applied. This includes scope for a reduced rate to be applied to the “renovation and alteration of housing, as part of social policy” and separately for “renovation and repairing private dwellings, excluding materials which account for a significant part of the value of the service supplied”. Therefore, the case will focus on whether the UK’s reduced rate for the installation of energy-saving materials falls within either of these two points.
If the UK is successful in defending its position then the UK’s reduced rate should not change. However, if the UK is unsuccessful then it will inevitably lead to change, most likely the removal of the reduced rate for all installations of energy-saving materials. Any change would be prospective and should follow the release of the decision, which can take several months from the hearing date. Additionally, as with many recent changes to the UK VAT position, there is usually a transitional period to replace the current rules. However, as any change would be triggered by the UK being found to have erred by the CJEU, it is difficult to predict its length.
The KPMG team has been liaising with finance, asset management and regeneration teams to assess the potential impact of a change and to maximise the extent to which the reduced rate can be applied to previous and current schemes. If you have incurred significant costs in connection with the installation of energy-saving materials historically ,or have budgeted for them in future, then members of our team are available to help you to understand the impact of this potential change and to identify opportunities to utilise the existing reliefs for these works fully.
After the dark cloud of the challenge to the reduced rate, the silver lining is the case law in connection with temporary staff. There are currently two cases that are due to be heard by the courts that could result in a reduction to the VAT applicable to supplies of temporary staff, Adecco and Go Fair Zeitarbeit. By way of background, the usual VAT treatment for supplies of staff is that they are standard rated for VAT purposes, including both any charge for the salary of the staff supplied and any additional fee from the supplier of the staff.
The Adecco case is an appeal by the taxpayer against HMRC’s view that VAT is due at the standard rate on the full value of charges in relation to the supply of temporary workers. It is the view of Adecco that the supply they make is only the service of introducing the temporary staff and, as such, VAT should only be applied to their introductory fee. Many of you will recall that a similar appeal was successfully taken by Reed, which bodes well for the Adecco appeal, albeit this considered the VAT treatment prior to changes in the employment regulations.
If Adecco is successful and HMRC’s view is found to be invalid, then VAT charged by employment businesses on the remuneration, PAYE, NIC etc. element of charges made to employers of temporary staff has been charged in error and VAT should only be due on the fee charged for the introductory service. Accordingly, these employment agencies should not be applying VAT to similar charges in future and would have an entitlement to seek a repayment of VAT, which should be passed onto customers in line with the unjust enrichment principles.
As the usual approach is for a supplier to make a claim for under-declared VAT, then in this instance the claim would be, or already should have been made, by the employment business. We have assisted many organisations, including housing associations, to contact their suppliers to ensure claims are made by them on behalf of the housing association.
If you require assistance in protecting your position or if you have a high value of VAT at stake on temporary staff and would like to explore additional action that can be taken to protect your position and realise alternative savings then please contact us.
Go Fair Zeitarbeit
Go Fair Zeitarbeit is a German case and is focused on supplies of services and goods closely linked to welfare and social security work, for which the EU member states are required to have a VAT exemption. More specifically, the case will consider whether the provision of state regulated care staff by a temporary staff business can qualify for the exemption for services closely linked to welfare and social security work.
At present it is HMRC’s view that where there is a supply of staff to a party (e.g. a housing association), and the recipient of the supply of staff is responsible for providing care to the end customer, then regardless of the role performed by the staff provided (i.e. regardless of whether their work is Care Quality Commission (CQC) regulated) then the supply is usually standard rated. As a result of the Go Fair Zeitarbeit case, HMRC may have to revisit this interpretation and potentially extend the scope for supplies of temporary staff to qualify for exemption where their service is closely linked to welfare and social security work.
Please note that where a welfare service is fully outsourced, i.e. the third party do not simply provide the staff for the service but also take responsibility for the delivery itself, the services provided are likely to already qualify for exemption, provided what is being delivered is CQC regulated.
The Adecco case has been listed for hearing at the First Tier Tribunal (the lowest of the UK VAT courts) from 11 to 15 May 2015. A decision in Go Fair Zeitarbeit is expected on 12 March 2015.
The KPMG team has extensive experience of assisting housing associations to address the risks and opportunities outlined above and many others. If you require assistance with the above points, would like further information or have any VAT questions then please contact your usual KPMG VAT contact or Dan Smith.
Further to the publication of the article above, the Go Fair Zeitarbeit decision has now been released.
The CJEU found that the exemption for welfare services does not extend to supplies of care staff by temporary staff businesses because the temporary staff business is not governed by public law, or seen as being devoted to social wellbeing. As such, although many VAT opportunities in connection with welfare remain available, for now at least VAT is still applicable to supplies of temporary staff providing welfare services from temporary staff businesses.
This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG in the UK.