VAT treatment of recharged salary costs

Employee salary costs can be liable for VAT when recharged between subsidiaries and related companies. Sarah Kay examines potential pitfalls for employers from risks for group payroll functions to distinctions of supply of staff or supply of services

Employee salary costs from wages to PAYE and pensions are often recharged between related companies. As the costs themselves do not bear VAT, it is commonly thought that VAT is not due when they are recharged. This is a misapprehension and, to avoid under declaring VAT, whenever a salary cost is recharged, the VAT position should be examined.

In this article, we will review the VAT treatment of employees’ salary costs recharged between UK companies.

Wages are recharged for a variety of reasons. In all cases, the questions to ask about the recharged wages are the same:

(1) Who is the employer of the individual staff members involved? and

(2) Is a supply of staff or services being made?