Why VAT is the first question on any secondment

Secondments are common in legal practice. A firm might place an associate inside a client's in-house team for six months, lend a specialist to another firm working on a shared matter, or move a fee-earner between entities in a group. In almost every case the firm that supplies the person recharges the cost to the host. The moment money changes hands, the first question is VAT, because the default answer surprises a lot of firms.

The short version is this: a secondment is a supply of staff, a supply of staff is standard-rated for VAT at 20%, and VAT is due on the full charge, including the salary, employer National Insurance and pension costs you pass on. The concession that used to let firms leave the salary element out of the VAT calculation was withdrawn on 1 April 2009, so since then the whole charge has been within scope. There are two genuine exceptions, but they depend on substance, not labels.

This guide sets out the supply-of-staff rule, the post-2009 full-charge position, the two no-supply exceptions, who runs PAYE, and the recharge and invoicing mechanics. It is written for firms regulated in England and Wales by the Solicitors Regulation Authority (SRA), although the VAT analysis is UK-wide. It is general information, not advice on a specific arrangement.

A secondment is a supply of staff, and a supply of staff is standard-rated

HMRC's position is that there is a supply of staff when one party makes its employee available to another party for a consideration. The consideration does not have to be a separate fee or commission: it can consist of the charges the employer passes on to the other party for wages, National Insurance and similar employment costs (HMRC manual VATSC03540). In other words, the act of lending the person for money is itself the taxable supply, and the money you charge is the consideration.

A supply of staff is standard-rated for VAT at 20%. That rate has been in force since 4 January 2011. There is no exemption and no reduced rate for seconding a solicitor, so where you recharge a secondment, you add VAT to the recharge. This sits alongside the general rule that a firm's own legal services are standard-rated at 20% (see our guide to VAT on legal services), but a secondment is a separate kind of supply, as the section below explains.

Because the supply of staff is standard-rated, the only real questions are the value VAT applies to (the answer is the full charge), whether one of the two no-supply exceptions applies, and whether the host can recover the VAT.

VAT is due on the full charge, including the recharged salary

This is the point that catches firms out, so it is worth stating plainly. VAT is due on the full value of the secondment charge, including the salary, employer National Insurance and pension costs you recharge. You cannot strip the wages out and charge VAT only on a margin or commission.

The reason is historical. Until 31 March 2009 there was a long-standing concession, the staff hire concession, which let employment businesses account for VAT only on the commission or fee element of a staff charge and disregard the salary, National Insurance and pension costs that were simply passed through. That concession was announced for withdrawal in the March 2008 Budget and was withdrawn with effect from 1 April 2009 (VATSC03540 states the concession is withdrawn with effect from 1 April 2009). Note the date carefully: it is 1 April 2009, not 1 January 2009.

Since 1 April 2009, the full value of the supply of staff is standard-rated, salary included. A firm that still charges VAT on only the mark-up is under-declaring output VAT and is exposed to an assessment plus interest, and potentially a penalty. If you have inherited a secondment recharge that was set up before 2009, or copied from a template that predates the change, check it.

It helps to see why the rule works this way. VAT is charged on the value of what is supplied, and what is supplied here is the staff member's services made available to the host. The salary, the employer National Insurance and the pension are not separate things the firm passes through as an agent: they are the firm's own cost of providing the person, and the firm is recovering that cost through the charge. So the consideration for the supply is the whole charge, and VAT applies to all of it. This is different from a true disbursement, where the firm pays a third party as the client's agent and passes the exact cost through outside VAT. A recharged salary is not a disbursement, because the firm is not the secondee's agent and the secondee is not the host's supplier; the firm is the supplier and the staff member is what is supplied.

That distinction matters because firms sometimes try to characterise the salary element as a disbursement to keep it out of VAT. It does not work. The eight-condition disbursement test is never met on a recharged salary, because the host is not responsible for paying the employee, the firm is. The salary is part of the value of the firm's standard-rated supply of staff, full stop.

The exceptions: when there is no taxable supply of staff

HMRC recognises two situations in which there is no taxable supply of staff. Both turn on the substance of the employment relationship, not on what the documents are called.

A genuine joint contract of employment

Where the secondee is genuinely jointly employed by two or more parties, HMRC accepts that it is not possible for one of the employers to make a taxable supply of the staff to another (VATSC03540: if staff are jointly employed by two or more parties it is not possible for one of the employers to make a taxable supply of the staff to another). The logic is that you cannot supply to another party a person who is already, jointly, that party's own employee.

The key word is genuine. Both parties must really be employers, with real employment obligations to the individual, not a one-sided secondment dressed up as joint employment. If the substance is that one firm employs the person and merely lends them, calling the arrangement joint employment will not remove the VAT charge.

A temporary suspension of the original employment

The second route is a secondment that involves a temporary suspension of the original employment contract. HMRC's position (VATSC03540) is that there is no taxable supply where a secondment involves a temporary suspension of the original employment contract. Where the secondee's original employment is genuinely suspended and they are employed by the host for the duration of the secondment, there is no supply of staff for VAT purposes.

Again, substance governs. The original employment must genuinely be suspended, and the host must genuinely employ the person for the period, with the PAYE and contractual position to match. A suspension on paper that leaves the original employer running payroll and directing the work will not satisfy the test.

Both exceptions share a common theme: they remove the VAT charge precisely because there is no longer one party supplying staff to another. In a joint contract, the person is already the host's employee, so there is nothing for the firm to supply. In a suspended-contract secondment, the host becomes the employer for the period, so again there is no supply from the firm to the host. The exceptions are not loopholes; they describe arrangements where the supply genuinely does not exist. That is why the substance has to be real. If the firm in fact carries on as the employer, runs the payroll and directs the work, then in substance it is supplying the person to the host, and the standard-rated supply of staff is back, whatever the documents say. HMRC will look at the reality of the relationship, so the contracts, the payroll records and the day-to-day control all have to point the same way.

Paymaster and cost-sharing recharges: handle with care

In some group or cost-sharing structures, one entity acts as a paymaster: it employs staff and recovers each other party's genuine share of the actual employment cost. Where the recovery is truly a reimbursement of a shared cost, rather than consideration for one party supplying staff to another, it may fall outside the scope of VAT. But this is fact-sensitive and easy to get wrong, and a recharge that is in substance one firm supplying staff to another is standard-rated like any other secondment.

Do not treat a paymaster label as a general way to take a secondment outside VAT. It is an area to take specific advice on, with the verified no-supply routes being the joint-employment and suspended-contract exceptions above. If your group operates shared services more broadly, the VAT-grouping rules may also be relevant, and that is a separate analysis from the supply-of-staff question.

Who employs the secondee, and who runs PAYE

In the standard secondment, the seconding firm remains the employer. It continues to operate PAYE on the secondee's pay and to pay employer (secondary Class 1) National Insurance, which is charged at 15% on earnings above the £5,000 secondary threshold from 6 April 2025. The firm then charges the host for the cost of providing the person, adding VAT to the whole charge. The secondee is paid through the firm's payroll throughout (see our overview of law firm payroll services).

The employment and PAYE position only changes if you use one of the no-supply structures. In a genuine joint contract of employment, the joint employers share the employer duties. In a suspended-contract secondment, the host becomes the employer for the period and operates PAYE. The point to hold onto is that the VAT analysis and the employment analysis are two sides of the same structure: if you want the secondment to fall outside a taxable supply of staff, the employer and PAYE reality has to support it, not just the VAT label.

There are some practical consequences of the firm staying the employer in the standard case. The secondee continues to accrue continuity of employment, holiday and pension rights with the firm, and the firm remains responsible for statutory payments such as sick pay. The firm also keeps the secondee within its own auto-enrolment pension arrangements, and the employer pension contributions form part of the cost the firm will usually recharge, which means they too sit inside the VATable charge. None of this is removed by the secondment; the firm is simply hiring out a person it continues to employ. The secondment agreement should record who is responsible for day-to-day supervision, conduct and any disciplinary issues during the placement, because the host directs the work even though the firm remains the legal employer. Getting that split clear in writing avoids disputes later and supports the VAT analysis you are relying on.

For an SRA-regulated firm there is also a regulatory layer. The firm seconding a solicitor should be satisfied about supervision, conflicts and confidentiality during the placement, and about how the secondee's professional indemnity position is covered. These are not VAT questions, but they sit in the same secondment agreement, so it is sensible to deal with the tax, employment and regulatory points together rather than in isolation.

The recharge mechanics and the invoice

In the default case, the seconding firm invoices the host for the agreed charge, whether that is structured as cost-plus or a day rate, plus VAT at 20% on the whole amount. The salary, employer NIC and pension recharged all sit inside the value that VAT applies to. The invoice is a standard VAT invoice, and the supply is treated like any other standard-rated supply for time-of-supply purposes (see our guide to the VAT tax point and time of supply for law firm billing).

The host recovers that input VAT if it is VAT-registered and uses the secondee for taxable activities. But a host that is exempt or partly exempt cannot recover all of it. An in-house legal team inside a financial or insurance business, for example, supports an exempt activity, so the secondment VAT becomes a sticky cost for that host (the mechanics are explained in our guide to partial exemption for law firms, which works the same way on the host's side). That is a real factor when you are pricing a secondment to an exempt host: the VAT they cannot recover is a cost to them.

It is worth drawing a clear line between a secondment and a supply of legal services, because the two get muddled.

If the firm is engaged to do legal work for the client, that is a supply of legal services. The fee-earner stays the firm's resource, works on the firm's instructions and under the firm's supervision and insurance, and the firm bills for the work done. That supply is standard-rated under the normal rules (and the firm should be alert to the disbursement question on any third-party costs it passes on, covered in our guide to disbursements and VAT).

A secondment is different. The firm makes the person available to work under the host's direction and control, often inside the host's premises and reporting to the host's managers. That is a supply of staff, not a supply of legal services. Both are usually standard-rated, so the headline VAT outcome is often the same, but the analysis differs and so does the employment, supervision and regulatory position. Classify the arrangement correctly before you set up the invoicing, because the wrong classification can carry into PAYE, professional indemnity and SRA questions as well as VAT.

A worked example: seconding an associate to a client

The following is illustrative only and dated to 2025/26 rates. It is not advice on a specific arrangement.

A firm agrees to second a salaried associate to a corporate client's in-house team for nine months. The associate's salary is recharged in full, together with the employer National Insurance and pension contributions on that salary, plus a modest margin to cover overhead and recruitment. Suppose the total monthly recharge works out at a round figure for illustration.

Because this is a supply of staff, VAT at 20% is due on the whole monthly recharge: the salary element, the employer NIC element, the pension element and the margin are all within the value VAT applies to. The firm cannot charge VAT on the margin alone, because the staff hire concession that once allowed that ended on 1 April 2009. The firm remains the associate's employer, runs PAYE and pays employer NIC, and invoices the client monthly with VAT on the full charge.

If, instead, the client could recover that VAT in full (it is VAT-registered and the secondee supports taxable activities), the VAT is cash-flow only for the client and not a real cost. But if the client's business were partly exempt, it would not recover all of the VAT, and the irrecoverable portion would be a genuine extra cost of the secondment. And if the parties had instead put the associate under a genuine joint contract of employment, or genuinely suspended the original employment for the period, there would be no taxable supply of staff at all, and the cost shared between them would sit outside VAT. The right answer depends entirely on the substance of who employs the associate.

A decision frame for secondments

When you are setting up or reviewing a secondment, work through the following:

  • Start from the default. A secondment is a standard-rated supply of staff, with VAT at 20% on the full charge, including the recharged salary, employer NIC and pension. The staff hire concession has been gone since 1 April 2009.
  • Consider the no-supply routes only on substance. A genuine joint contract of employment or a genuinely suspended original contract can take the arrangement outside a taxable supply of staff, but only where the employment reality supports it.
  • Line up PAYE with the VAT analysis. Decide who employs the person and who runs PAYE, and make sure that matches the VAT treatment you are relying on.
  • Check the host's VAT recovery. If the host is exempt or partly exempt, the VAT you charge may be a real cost to it, which affects the commercial deal.
  • Classify secondment versus legal services. Make sure you are clear which supply you are making, because the employment, supervision and regulatory position follows.
  • Document everything. Contracts, the secondment agreement, the PAYE position and the invoicing should all tell the same story.

This kind of structuring sits at the intersection of VAT, payroll and the SRA position, and it pairs naturally with the wider cash-flow and funding questions a firm faces: see our companion guides on tax loans for law firm partners, the apprenticeship levy and solicitor apprenticeships, and financing PII premiums.

A specialist note to close

The secondment VAT trap is narrow and specific: do not assume the recharged salary is outside VAT, because that has been wrong since 1 April 2009. Get that one point right and most secondments are straightforward, standard-rated supplies of staff. The genuine planning lever is the no-supply structures, and they only work where the employment substance genuinely supports a joint contract or a suspended contract. If you are setting up a secondment, whether outbound to a client or another firm or inbound to your own team, a short review of the VAT, PAYE and recharge mechanics before the arrangement starts is far cheaper than unwinding an under-declaration later. A legal-sector-specialist accountant can confirm the treatment for your specific facts.