ESM5010 - VAT

UK VAT law on the question of employment status is governed by Article 9 (1) of the Council Directive 2006/112 (The “Principle VAT Directive”), which deals with the subject of “Taxable Persons”.

Paragraph 1 of Article 9 defines a taxable person as follows:

“Taxable Person” shall mean any person who independently carries out in any place any economic activity, whatever the purpose or results of that activity.

The remainder of that paragraph describes those economic activities:

Any activity of producers, traders and persons supplying services including mining and agricultural activities and activities of the professions, shall be regarded as exonomic activity. The exploitation of tangible or intangible property for the purpose of obtaining income therefrom on a continuing basis shall also be considered an economic activity.

Article 10 clarifies the meaning of the word “independently” in Article 9 (1):

The condition in Article 9 (1) that the economic activity shall be conducted “independently” shall exclude employed and other persons from VAT in so far as they are bound to an employer by a contract of employment or by any other legal ties creating the relationship of employer and employee as regards working conditions, remuneration and the employer’s liability.

The effect of the above is that where employees act on behalf of their employers, they are not “taxable persons” and their activities are therefore outside the scope of the tax (although they could of course be self-employed and thus “taxable persons” in another context). UK VAT law expresses this at Section 4(1) of the VATA 1994 as follows:

VAT shall be charged on any supply of goods or services made in the United Kingdom, where it is a taxable supply made by a taxable person in the course or furtherance of any business carried on by him.

How to determine Employment Status for VAT purposes?

HMRC considers the same factors when determining employment status for Direct Tax, and VAT purposes. As a result the status should be the same regardless of which section within the department is considering it, unless there are clear reasons to do otherwise.

There is also a common approach to the determination of employment status for National Insurance purposes, for example, HMRC has the power to determine by statutory instrument that particular groups of workers should be treated as Class 1 (employed) or Class 2 (self- employed).

For Direct Tax purposes earnings from employment are normally chargeable as employment income and earnings from self-employment chargeable as trading income. Consequently, persons who have income from more than one source can be chargeable to both employment income and trading income. If a trader is chargeable to both employment income and trading income, then only the gross monies earned from the work chargeable under trading income should be considered as being potentially subject to VAT and for which registration may be appropriate.

Exceptions to normal practice.

There are however, occasions when we cannot follow the same practice for Direct Tax and VAT purposes. For example, the treatment of “Office Holders” for Direct tax purposes is not determinative of whether the activity is undertaken by way of business, whereas for VAT purposes it is, (see V1-6, Section 6).

HMRC sometimes agree to tax all of a person’s income as chargeable under either employment income or trading income for administrative convenience, even though that person may receive income of both types. There will be instances where a trader argues for a different VAT status from his Direct Tax status and, in other instances, the personal tax status of a person may be unknown or undecided. However, on all these occasions you will need to examine the contracts that have been entered into, to decide which are contracts of service (employment) and which are contracts for services (self employment).