Payroll services supplied by charities under ‘direct payments’ can be exempt from VAT.

A charity has won a significant VAT case against HMRC concerning provision of payroll services to disabled persons. The charity successfully argued that such supplies should not be subject to VAT, using the welfare exemption.

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24 June 2019

CCL provides a range of services for disabled persons, families and carers. The case concerned CCL’s services in administering ‘direct payments’ to disabled persons who employ personal assistants who help with everyday tasks.

CCL’s service paid from the direct payments included a payroll service and it argued that these services were ‘closely linked’ to the welfare services supplied by the personal assistants,  i.e. 'the supply of services … closely linked to welfare and social security work' within EU VAT law and were welfare services as defined in the UK VAT Act being “services which are directly connected with … the provision of care, treatment or instruction designed to promote the physical or mental welfare of elderly, sick, distressed or disabled persons …”

The FTT found that without the payroll service there would be reduced value in the care package supplied to the disabled person, and that many of them would not otherwise use a personal assistant, to the detriment of their care plan. The FTT therefore agreed that the payroll services should be exempt.

It is understood that this was a test case and it is possible that HMRC will appeal the decision but any charity operating payroll services for beneficiaries in receipt of direct payments needs to review their position.

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