Partially exempt businesses - saving VAT on recruitment costs
A partially exempt business needs an interim finance director for six months and a recruitment agency is proposing to charge an hourly rate plus VAT for the person’s services. Is there a more VAT-efficient way of structuring the deal?

Residual input tax
For a partially exempt business the costs of a finance director will be usually classed as a “mixed cost”, i.e. relevant to both taxable and exempt supplies. This means that the business can claim some input tax on the expense but not all of it. It is likely that they will use the standard method for partial exemption purposes, where the amount claimed is based on the percentage of taxable and exempt income at the end of each VAT period, though it is possible to agree an alternative method by agreement with HMRC.
If a partially exempt business mainly has taxable income, the input tax disallowed on mixed costs and general overheads will be low with the standard method. The VAT cost of the arrangement might therefore be insignificant. Zero-rated sales are still taxable.
Single fee
An alternative approach is for the business to directly recruit the finance director as a temporary employee and only pay the recruitment company a single placement fee at the beginning of the six-month term. It is possible that the finance director might have their own company or self-employed business so would invoice the business directly.
The above approach would fail if the finance director had their own self-employed business that was registered for VAT, i.e. the partially exempt business would still pay VAT under this revised arrangement.
Example. ABC Recruitment Consultants is paying gross wages to John of £800 per week and also £100 employers’ NI contributions to HMRC. His time is being charged to Insurance Broker Ltd at a rate of £1,200 per week plus VAT for six months. If John became an employee of Insurance Broker Ltd, and ABC charged a single placement or finder fee of £7,800 plus VAT of £1,560, this would reduce the VAT paid by Insurance Broker Ltd by £240 x 26 weeks less £1,560 = £4,680. The fee of £7,680 is based on the £300 per week mark-up applied by ABC on John’s time over six months.
Insurance Broker Ltd would have to comply with the normal laws that apply to employees. IR35 issues would need to be considered if John had his own personal services company.
Joint contract of employment
If an employee has a joint contract of employment with two different employers, any recharges of salary costs between the employers is not subject to VAT. In such cases, the payments will qualify as a disbursement. This will include the recharge for employers’ NI contributions and any pension costs.
In such cases one of the employers will usually be the paymaster and deal with salary slips and PAYE issues. The profit of the recruitment company on the deal will be separately charged as in the example above and be subject to VAT.
The different employers must be clearly named in the contract, i.e. Company A, Company B, etc. It is not sufficient to have a contract with, say, Company A with a clause that the employee will work for Company B when required.
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