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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