Staff supplies

My UK client employs and then supplies staff to retail stores throughout the UK EU and sometimes outside the EU. The staff are highly trained in customer service techniques and my client will employ the staff on his payroll and then apply a mark-up to the wages (plus employer’s National Insurance contributions) when recharging the client.

He has been approached by the head office of a retail client in the UK requesting a VAT credit for the past four years because he has supplied staff for a store in Norway where the client has a number of outlets.

Apparently HMRC carried out a VAT audit and disallowed all of the input tax claimed by the retail client. This was on the basis that my client should not have included VAT because the staff were working outside the EU. Is this correct?

In my view HMRC appear...