Does VAT need to be charged on wage costs recharged to another business?
Several clients have asked this question over the years, and for a very good reason. There is no VAT on wages, so surely recharging wages to another business is VAT-free too?
We have a number of clients that operate multiple businesses and, from time to time, they second members of staff from one business to another while keeping them on the payroll of the original business. They will usually then raise an invoice to cover part/all of their wage cost.
Under VAT rules this constitutes a supply of services, in the same way as it would do if a recruitment agency provided a temporary worker, and VAT must therefore be added to the invoice.
In most cases both businesses will be VAT registered and any VAT charged by one business will be recoverable by the other, and this therefore is more of an admin point than a cost.
But what if the business providing the staff is VAT registered, while the other is not, maybe because it is VAT exempt (eg. a financial advice business or a day nursery)? In this case VAT could represent a cost to the business incurring the cost.
One possible solution to this where the businesses in question are under common ownership would be to form a VAT group, whereby the companies in the group share a single VAT number and no longer have to charge VAT on charges between members of the group. However, forming a VAT group may lead to less VAT recovery on costs overall for the group due to the application of partial exemption rules at a group level, and therefore detailed advice should be sought.
An alternative would be to create a joint employment contract, allowing more than one business to pick up the employment cost, which should then avoid the need to cross charge the wage cost for the employees in question. For any matters relating to employment contracts we’d recommend seeking the advice of an HR expert or employment lawyer.
Key Facts
- Recharging wage costs constitutes a supply on which VAT must be charged
- This applies even though wages themselves are not subject to VAT
- Where one business cannot recover the VAT consider forming a VAT group
- Alternatively you could consider a joint employment contract
For further advice on this matter please contact me.
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