VAT and Employment Agencies

The Social Partnership Agreement, ‘Towards 2016’, contains a commitment to improve the regulation of employment agencies and agency workers. New legislation is to be published, which will require all employment agencies established and/or operating in the State to be licensed. The purpose of this article is to confirm the VAT treatment that applies in relation to staff sourced, placed or made available by employment agencies.

1. VAT treatment of consideration for the supply of staff by employment agencies - general

The status of agency staff who are sourced, placed or made available by employment agencies is a matter of fact determined on the basis of contracts and/or the actual working and other arrangements that may exist from time to time between the staff, the agency and the company, firm, body or other entity in which the staff work, referred to below for convenience as the ‘organisation’.

In accordance with Section 10 (1) of the Value-Added Tax Act 1972, as amended, VAT is chargeable on the full consideration which the agency becomes entitled to receive in respect of or in relation to the supply of agency staff to the organisation, including all taxes, commissions, costs and charges whatsoever but not including VAT chargeable in respect of the supply. The relevant rate of VAT is the standard rate in force at the time of the supply (currently 21 per cent).

If an agency is acting as principal in the supply of staff to organisations, the ‘full consideration’ which the agency becomes entitled to receive in respect of or in relation to the supply includes such monies as commissions, fees, wages, employers’ PRSI, holiday pay, sick pay, and other monies due under the Organisation of Working Time Act 1997.

On the other hand, if an agency is acting as agent in the supply of staff to organisations, the ‘full consideration’ would normally exclude such monies as wages, employers’ PRSI, holiday pay, sick pay, and other monies due under the Organisation of Working Time Act 1997.

The VAT treatment does not affect the position in relation to the operation of PAYE/PRSI. The following paragraphs outline the VAT treatment which applies in the different situations that may arise.

2. Employment agency providing placement service only (and staff employed by and paid by the organisation)

In the following circumstances:

1. Where staff are placed by the employment agency and are employees of the organisation in respect of this placement, and
2. The contract between the staff and the agency provides that the employment agency is placing the staff and that the staff are employees of the organisation, and
3. The employment agency receives written confirmation from the organisation, which confirms that the organisation is the employer of the staff in respect of this placement,

VAT must be charged on the full consideration that the agency becomes entitled to receive in respect of or in relation to its placement of agency staff in the organisation.

This VAT treatment does not affect the existing position in relation to the operation of PAYE/PRSI. The organisation must operate PAYE/PRSI in respect of the ‘agency staff’ (unless the position outlined in section 3 below applies).

3. Employment agency providing placement service plus ‘payroll bureau service’

Where the position outlined in 2 above applies and the employment agency also provides a ‘payroll bureau service’ on behalf of and for the account of the organisation, and the following circumstances exist:

1. A separate bank account is maintained by the agency into which the direct reimbursement of wages, employers’ PRSI, holiday pay, sick pay, and other monies due under the Organisation of Working Time Act 1997 are lodged, and
2. The funds in this account belong to the organisation at all times and are held in trust by the agency until they are paid out to the staff or returned to the organisation. In this regard, statutory and voluntary deductions from pay and employers’ PRSI will be regarded as paid to or in respect of the staff when passed on to the appropriate body, e.g. Revenue, banks, health insurance providers, trade unions, etc,

VAT must be charged on the full consideration that the agency becomes entitled to receive in respect of or in relation to its placement of ‘agency staff’ in the organisation and its ‘payroll bureau service’. However, VAT would not be chargeable on the direct reimbursement of wages, employers’ PRSI, holiday pay, sick pay, and other monies due under the Organisation of Working Time Act 1997.

This VAT treatment does not affect the existing position in relation to the operation of PAYE/PRSI. The agency must operate PAYE/PRSI in respect of the ‘agency staff’.

4. Other situations

Where the requirements at 2 above and, where appropriate, 3 above are not satisfied in full, then:

1. The employment agency is regarded, for VAT purposes, as principal in the provision of staff.
2. The staff are regarded as employees of the employment agency.

In these circumstances, VAT must be charged on the ‘full consideration’ (regardless of how described) which the agency becomes entitled to receive in respect of or in relation to the supply of services, including all monies, as set out above, in its capacity as principal.

This VAT treatment does not affect the existing position in relation to the operation of PAYE/PRSI. The agency must operate PAYE/PRSI in respect of the ‘agency staff’.