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Revenue and Customs Brief 16 (2020) VAT liability of payroll services


HM Revenue and Customs -Tax Authorities

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Published 22 October 2020

1. Purpose of this brief

This brief tells you about HMRC’s position following the decision by the Cheshire Centre for Independent Living (‘Cheshire’) to concede the appeal in the Upper Tribunal. Because the Upper Tribunal set aside the decision of the First-tier Tribunal, there is no change to HMRC’s position which is that the Cheshire case was wrongly decided on the grounds set out by the First-tier Tribunal.

The case concerned the VAT liability of payroll services provided to disabled persons to enable them to employ a personal assistant to help them to live in their own homes. The issue was whether this was a service directly connected with the provision of care and therefore exempt.

2. Who needs to read this

This brief applies to:

  • organisations that make supplies of payroll services to disabled persons and their advisers
  • businesses with appeals claiming payroll services are exempt, where the appeals are currently stood behind HMRC’s appeal in Cheshire

3. Background of the First-tier Tribunal’s decision

The supply of services by a charity or a state-regulated body which are directly connected with the provision of care is exempt under Item 9 of Group 7 of Schedule 9 to the VAT Act 1994. This implements the VAT exemption for the supply of services closely linked to welfare work in article 132(1)(g) of the Principal VAT Directive.

Cheshire is a charity that provides a range of support services for disabled people, one of which is a payroll service.

The disabled persons will receive direct payments from the local authority to enable them to employ a personal assistant to help them live independently in their own homes.

There are various legal and administrative requirements for the employment and this includes payroll services, such as:

  • calculating wages
  • deducting PAYE and NICs
  • registration and filing with HMRC
  • auto enrolment for pension contributions and redundancy
  • sick and holiday payment calculations

Cheshire entered into contractual arrangements with the disabled persons to provide these payroll services.

HMRC’s view was that the payroll service did not qualify as a service directly connected with welfare under Item 9 of Group 7 and was therefore standard rated for VAT.

The First-tier Tribunal allowed Cheshire’s appeal on the grounds that exempting the payroll service from VAT was consistent with the objective of reducing the cost of care and increasing its accessibility to the individuals involved. This was ancillary to the care and support provided by the personal assistant and was essential to the latter service.

It concluded the service met the terms of both Item 9 of Group 7 and article 132(1)(g) of the Principal VAT Directive. The decision is reported at [2019] UKFTT 354 (TC).

4. Clarification of HMRC’s policy and HMRC’s appeal

HMRC’s position was that the First-tier Tribunal had erred in law because the decision did not take full account of the tests laid down in Diagnostiko & Therapeftiko Kentro Athinon-Ygeia AE (Joined Cases C-394/04 and C-395/04).

These included a requirement that to be exempt the services had to be ‘logically part of, or an indispensable stage’ in the provision of the general care and domestic help provided to the disabled person.

HMRC considers that test was not met and so the payroll services were not directly connected to or essential to achieving the objectives of that care.

HMRC was also given permission to appeal on a further ground which was accepted by Cheshire. The further ground was that the payroll service could not be ancillary to the care provided to the disabled individuals, since an ancillary service can only be exempt if it is ancillary to a principal exempt service.

The personal assistants were employed by the disabled individuals in question and so the care they provided was:

  • under a contract of employment which was outside of the scope of VAT
  • could not be an exempt supply

The supply of payroll services could not therefore be exempted because it:

  • was ancillary to a non-exempt service
  • did not meet one of the preconditions for being a supply closely linked to welfare

There is no change to HMRC’s policy which is that these payroll services are not exempt welfare services. The guidance on direct payment services in paragraph 5 of VAT notice 701/2 Welfare Services and Goods refers to exempt welfare services provided to the recipient of care.

The payroll services are not covered by this guidance.

5. Rejection of claims to exemption made in reliance on the First-tier Tribunal’s decision

The effect of Cheshire’s withdrawal of its appeal in the Upper Tribunal is that the First-tier Tribunal’s decision has been overturned. With the consent of the parties, the Upper Tribunal ordered that the substantive decision made by the First-tier Tribunal on 3 June 2019 be set aside and remade. However, as Cheshire have withdrawn from the case, it will not now be reheard in the First-tier Tribunal.

As a result of the Upper Tribunal’s setting aside of the First-tier Tribunal decision, it is not possible to rely on that decision as determinative. HMRC’s policy remains as set out above, and cases for claims to exemption where the facts are materially similar to those in the Cheshire case will be rejected.

6. Appeals stood behind Cheshire

HMRC will now write to any other appellants asking them whether they intend to proceed with their appeals given these developments. This will not affect their right to continue with their appeals, should they wish to do so.

7. Other suppliers who provide payroll services to disabled persons

Other suppliers (with similar arrangements to Cheshire Centre) who have not yet accounted for VAT on these supplies, should now do so with immediate effect. Taxpayers who have not accounted for tax correctly in the past should follow the guidance in Correct Errors in Your VAT returns.

8. More information

For more information on the VAT treatment contact the VAT helpline.

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