New VAT implications for hiring organisations

Recent changes to employment legislation increase the cost of hiring temporary workers through recruitment agencies.

The abolition of the VAT staff hire concession on the 1st April could have far reaching consequences for the recruitment industry and all firms who hire temporary workers through recruitment agencies.

The changes that came into effect are summarised below:

  • Where an employment business supplies workers to an end-user client, that employment business will be required to charge VAT on the full amount of the supply, which will include the full salary, employers’ National Insurance and commission.
  • Previously, employers had only paid VAT on the commission. For example, instead of paying 25% on the commission element only, hiring organisations will now be paying 25% on the full cost of supply.

The concession was originally introduced in 1997 to provide a level playing field between agencies whose clients could recover all or some the VAT, and those who were unable to reclaim VAT. Organisations exempt from paying VAT included banks and insurance companies, charities, private care homes and healthcare providers, as well as universities and private schools. It is recruiters in these areas that could be hit hardest.

Recruiters and trade industry bodies have warned that the removal of the staff hire concession will have damaging consequences. The Recruitment and Employment Confederation (REC) estimates that the cost to clients of using temporary staff will increase by £400m a year and effectively equate to a tax on jobs at a time when the number of people unemployed is growing.

Can the changes be avoided?

There aren’t currently a lot of suggestions as to how this tax can be avoided. One way in which employers could get round this issue is by converting their temporary staff to permanent employees. Another alternative is to switch your recruitment focus from temporary to permanent staff altogether, although this will present employers with a considerable challenge and many hiring organisations won’t want to lose the flexibility having temporary staff brings, even though this flexibility now comes at a much higher premium.