This scenario may arise where a member of staff needs to work for the subsidiary, perhaps where the operational activities or requirements change.
The recharge of staff is usually a standard VAT rated supply, and so for a trust that is registered for VAT it will be necessary to charge VAT on the invoice. If the subsidiary cannot register for VAT itself, for example if it only makes exempt supplies, it will not be able to reclaim the input VAT, resulting in a net VAT cost for the transaction. A VAT group will not be the solution in this scenario either.
A common solution to the issue is the use of dual or split contracts, with the individual’s time spent working for the subsidiary processed through the subsidiary’s payroll. A dual contract avoid the need to recharge costs and therefore the VAT recovery issue. Whilst a neat solution to the VAT problem, this approach has a practical consideration for the employee’s pension arrangements. The employee will, understandably, be reluctant to give up their right to the attractive employer TPS or LGPS pension contributions on the full amount of their salary. Unless a special arrangement is entered into in respect of the pension, to maintain their equivalent pension rights, the dual contract option may not be feasible. We have seen, on occasion, trusts make arrangements to ensure the pension rights are not affected, but this requires legal advice and the involvement of the TPS or LGPS.
The next step
If you have a scenario like the one explained above, or indeed any proposed transaction with a VAT angle, it is important that you take appropriate advice, so speak to your nearest UHY academy or VAT expert.
