VAT Exemption on Provision of Payroll Service – does this
fall under the exemption in the VAT Act 1994
In a recent first tier tribunal case Cheshire CIL was in
dispute with HMRC over the VAT treatment of charges made to disabled people for
the running of a payroll service. The
judge found in favour of Cheshire CIL and decided the service was “closely
linked to welfare” and as such fell under the welfare services exemption in Schedule
9 Group 7 Item 9 VATA 1994.
Many disabled people may need a carer and they are
encouraged to engage directly with their carer, so they become an
employer. Cheshire CIL and other charities get involved in a number of
ways and one of which is to offer to manage the payroll on behalf of the
disabled person for their carer. In most case this means running a
payroll service for just one employee so charities such as Cheshire CIL will do
this on behalf of numerous disabled people as well as managing their direct
payments. In these cases, as a consequence of the disability of the
customer, extra guidance and help is needed. So this is not a standard payroll
service. It is the charges made for this payroll service that are at
issue in this case. HMRC said the supplies were standard rated, whereas
the charity says they are exempt as a supply closely linked to welfare.
The first-tier tribunal decided in favour of Cheshire CIL.
Basis for decision
The charity’s argument was that in this case you should not
seek only to assess the objective content of a service, divorced from the
capacities of its recipient, but should consider what the service means to that
recipient. It is the nature of the need that determines if it is
welfare. They argued the exemption applies solely to charities making
supplies to people in certain special classes which denote some form of social
security aspect. The tribunal accepted this.
The tribunal accepted the view that, without the payroll
service, the disabled user would not have the capacity to engage the
carer. If charged VAT for the service, the user’s benefits payment would
be reduced by the VAT charge leaving them less to use to pay for the carer’s
time, thus reducing the level of welfare. It also accepted that the service
was only relevant as a result of the need for care services and was “closely
linked” with welfare activity. It merely better enabled enjoyment of the
supply of welfare by the carer, which (HMRC agreed) was, in itself, an exempt
welfare service. The intention behind the welfare exemption was served by
exempting this service, as it was part and parcel of the care provision.
The tribunal agreed that the service was ‘ancillary’ to the
welfare supply in the manner discussed above, to give a basis for the exemption.
The judgement was handed down on 3rd June 2019
and leave of appeal was granted to HMRC who have 56 days to appeal against the
If you would like to discuss this article in more detail or you would like to speak with a member of our team, please on 01772 821021 to be put in contact with a member of our Specialist VAT Advisers team.