Commentary

V2.246 Business/non-business—employments

Part V2 Registration – deregistration

V2.246 Business/non-business—employments

V2.246 Business/non-business—employments

This paragraph examines the business status of employments for VAT purposes.

For an overview of VAT and business more broadly, see V2.201B.

The essential distinction is between a person engaged under a contract of service (employee) and a person engaged under a contract for services (self-employment). The UK VAT legislation is silent on the position of employees and it may therefore be taken as self-evident that an employee acting as such under a contract of service does not thereby carry on a business.

If confirmation of this position were required, the EU legislation provides that the defined class of taxable persons excludes 'employed and other persons … 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'1.

The reasons for this exclusion have been set out by Advocate-General Sharpston in JA van der Steen2:

'The advantages in excluding employment from the scope of VAT are obvious. If it were not excluded, every employee would have to be registered for VAT and the tax would have to be charged on all salaries. Employers making taxable supplies would admittedly be able to deduct that VAT, but there would be a considerable burden on those making exempt supplies unless a compensatory mechanism were introduced, and such a mechanism would itself be burdensome. By contrast, when

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