Employment Costs: Experts warn new VAT rules for temporary staff will be expensive

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The Independent Online

Changes to the VAT rules governing temporary staff will significantly raise costs for some companies and could force a rethink of their employment strategies, experts said.

The Chancellor expects to raise £150m in 2009 and £125m in 2010 by withdrawing a VAT concession on staff hire from April 2009. This would affect a wide range of industries, including banking, insurance, health, charities and schools. Currently, employment agencies are for tax purposes allowed to exclude the wages element from staff they supply, and to account for VAT solely on their margins. But from April 2009, businesses will have to add 17.5 per cent to the cost of temporary staff.

This could prompt companies to employ fewer seasonal staff, according to the Association of Technology Staffing Companies. Ann Swain, its chief executive, said: "If organisations have to pay VAT on temps' pay and not just the recruiters' margin, the cost of using temps is going to rise significantly. "The Government is forever praising the contribution temporary workers make to UK competitiveness but, if VAT is charged on fees, organisations may use fewer temps and the flexibility of the labour market will be compromised.

"Recruitment companies help to keep clients' costs down by structuring their services in ways that take advantage of the current VAT concession. For them, an abolition of the concession could prove a real headache."

Mike Bailey, head of indirect tax at PricewaterhouseCoopers, said: "This will add a significant cost to the use of temporary workers and may lead some companies to rethink their employment strategy."

The financial industry is expected to take the biggest hit from the changes, while the health and education sector will also be affected.