VAT on payroll services – the latest

Many care and support employers use a payroll service, rather than having to cope with the admin themselves. A recent court judgement suggests that such payroll services should not be subject to VAT.

Certain organisations and charities representing disabled people who take on a carer or personal assistant (PA), have been involved in a long-running dispute with HMRC over the VAT treatment of charges made by payroll providers when running a payroll service for them.

Our friends at Independent Living set out the background to the issue in this article (including some commentary on the VAT situation from us), but in a nutshell HMRC say the payroll services are standard rated (that is, subject to VAT at 20%), as opposed to exempt as a welfare supply.

In a recent test case, the First tier Tribunal has decided that such payroll services are not standard rates and are exempt from VAT as a welfare supply.

Referring to four guiding principles, the judge said:

‘….on the first principle we conclude that exempting the Payroll Service from VAT is consistent with the objective of reducing cost of care and support (which comes out of the individual’s personal budget) and increasing accessibility to individuals who can benefit therefrom (given especially the Government’s aim that people should be encouraged to take ownership of their care planning, with Direct Payments as the preferred mechanism of delivery). 

‘On the second principle, we conclude that the benefits of the services required by the individual’s care and support plan would be hindered by the increased cost of incurring VAT on the Payroll Service; again, the cost of the Payroll Service comes out of the individual’s personal budget.

‘On the third principle, we conclude that the Payroll Service does not constitute an end in itself but is instead a means for better enjoying the services of the Personal Assistant, which is part of the services required by the individual’s care and support plan. Without the engagement of a Personal Assistant to deliver at least part of the disabled person’s care and support needs, there would be no employer role and thus no need to use the Payroll Service. 

Delivery of the care and support plan is better enjoyed by the individual by taking Direct Payments and employing a Personal Assistant – indeed, that route is actively encouraged by the Department of Health’s advice to both local authorities and health bodies. We agree with the VAT Tribunal in Watford Help in the Home Service and this Tribunal in YMCA that the Payroll Service must be viewed in the particular context of its provision to recipients of Direct Payments, rather than by comparison to employers generally who may choose to engage a payroll bureau.

‘On the fourth principle, the nature and quality of the Payroll Service is such that, without it, there would be a lesser value to the disabled person of the care and support package; without using the Payroll Service many disabled persons would have to forego taking a Personal Assistant (because they could not cope with the employer responsibilities) and that would be to the detriment of the chosen  method of delivery of the care and support plan, despite the statutory assumption that the individual is best placed to judge their own wellbeing needs (s 1 Care Act 2014), and the insistence by the Department of Health that disabled people should take ownership of their care planning see [26] above).

What does this decision mean for those using payroll services?

We welcome this decision and it is somewhat gratifying that many of our thoughts (as set out in the Independent Living article) about the VAT situation tally with what was said by the judge. However, a decision of the First-tier Tribunal is not ‘binding’ which means that HMRC do not have to follow it in other similar cases. It is likely that HMRC will appeal this decision, so it is a case of watch this space, but for the time being you should expect to carry on paying VAT.

(28-06-2019)