Revenue and Customs Brief 16 (2020) VAT liability of payroll services
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Published 22 October 2020
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
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
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.
implements the VAT exemption for the supply of services closely linked
to welfare work in article 132(1)(g) of the Principal
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
reported at  UKFTT 354 (TC).
4. Clarification of HMRC’s policy and HMRC’s appeal
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
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
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
- could not be an exempt supply
The supply of payroll services could not therefore be exempted
- 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.
About the Author
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Article Published/Sorted/Amended on Scopulus 2020-10-22 14:24:56 in