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.

The reasons for this exclusion were set out in a European context by Advocate-General Sharpston in JA van der Steen1:

'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 employment is excluded from the scope of VAT, the cost of that employment forms part of the value added to output supplies. It is thus automatically included in the tax base when those supplies are taxed, but has no effect, in VAT terms, on exempt output supplies. In addition to a considerable saving in administrative work, the neutrality of the tax and its general application to taxable supplies are ensured.'

The first

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