Government to charge VAT for temp workers

Employment agencies accused the Government yesterday of hypocrisy for considering charging VAT on temporary workers. They said taxing the use of "temps" would run counter to ministers' repeated praise of their contribution to UK competitiveness.

HM Revenue and Customs launched a review last week of an exemption from VAT for companies that use staff either directly or through an employment agency. The Association of Technology Staffing Companies (ATSCo) warned that abolishing the "staff hire VAT concession" would lead to the cost to UK businesses of using temps jumping by millions of pounds.

Ann Swain, ATSCo's chief executive, said: "If organisations have to pay VAT on temps' salaries, the cost to UK plc 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 temps' salaries, organisations will use fewer temps, and the flexibility of the UK labour market will be compromised."

Tarlo Lyons, a City law firm, said a range of industries would be affected by and end to the exemption including banks, insurance companies, charities and schools. Frances Lewis, a lawyer at the firm, said: "A number of large recruitment companies help keep their 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."

A spokesman for the CBI, the employers' group, said: "If the exemption is abolished it would be yet another example of how the Government is damaging UK competitiveness through the tax equivalent of death by a thousand cuts.

"As the reach of the taxman constantly extends so businesses consider alternative domiciles. The relatively small amount of tax generated by abolishing this concession would be far outweighed by the sums lost if companies were to pursue these avenues."

HMRC is inviting representations in its review of the VAT arrangements for temps until 31 August.

In a separate development HMRC was denied leave to appeal against a Court of Appeal decision that restricted its ability to tax non-resident companies. KPMG said the decision, which tackled corporate residency, was good news for multinational companies with overseas subsidiaries and private equity houses.