The charity sector could be facing a £20m hit following a Court of Appeal ruling that employers must pay VAT on the wages of temporary staff employed through an agency; a practice which is rife among third-sector organisations.
In the case, Adecco and others v HM Revenue & Customs, judges ruled that VAT is chargeable on the staff remuneration element of a payroll charge made through a staff agency.
Unlike commercial companies, charities cannot reclaim VAT on agency fees because their services are either not business services, or are exempt from VAT. One estimate puts the total VAT bill at £20m.
The Charity Tax Group technical adviser Graham Elliott believes that an appeal to the Supreme Court is unlikely.
He said: “A massive VAT disadvantage to this form of flexible employment structure has been created, in such a way as to amount to a restrictive practice, particularly of disadvantage to the charity sector.
“The courts may have made the application of the law clear, but it is now down to the politicians to consider whether changes should be made which can rescue the law from these unintended consequences.”
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