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HMRC reaffirms VAT liability of payroll services following Cheshire case

27 October: HMRC has reiterated that payroll services offered by third parties to disabled individuals employing personal assistants are not VAT exempt, maintaining a First-tier Tribunal case was ‘wrongly decided’.

In its latest Revenue and Customs Brief (16/20), HMRC has outlined why such payroll services are liable to standard rate VAT following the conclusion of proceedings involving Cheshire Centre for Independent Living (CCIL).

In January 2013 HMRC ruled that the payroll services offered by the charity to disabled individuals employing personal assistants were not exempt from VAT. It concluded that the services were not “directly connected” with the welfare of the disabled individual, as required under Item 9 of Group 7 of Schedule 9 to the VAT Act 1994.

The First-tier Tribunal (FTT) granted CCIL’s appeal against this decision in June 2019. The FTT concluded that the services did meet the terms required under the UK legislation and the originating EU Directive (Article 132(1)(g) of VAT Directive).

In Brief 16/20, HMRC maintains that the FTT’s conclusion was erroneous as it had not taken “full account” of the tests laid down in the cases of Diagnostiko & Therapeftiko Kentro Athinon-Ygeia AE (C-394/04 and C-395/04). As such, HMRC’s interpretation of the legislation remains unchanged.

In its appeal to the Upper-tier Tribunal (UTT), alongside restating this argument, HMRC offered new grounds under which the payroll services were liable for VAT which CCIL conceded. The result is that FTT’s decision has been set aside and the case will not be reheard.

HMRC’s secondary grounds were that these payroll services could only be exempt from VAT if they were ancillary to a primary service that was exempt.

HMRC argued that as these personal assistants were employed by disabled individuals directly they were not “a body governed by public law nor another body recognised by the UK as being devoted to social welfare” as stated in Article 132(1)(g).

As such the contract of employment was “outside the scope of VAT”, making them a non-exempt service. This means payroll services cannot qualify as exempt.

HMRC is contacting organisations that are appealing on the basis of the FTT decision to confirm whether they will continue with their cases.

It has also urged suppliers of similar payroll services to account for VAT on these supplies with immediate effect.