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VAT staff hire concession abolition could hit agencies

Published on Mar 25, 2009 |

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Many recruitment agencies will be dreading the withdrawal of the VAT staff hire concession from 1st April 2009, as the costs to non-VAT registered clients of hiring temporary workers will increase significantly.

The Staff Hire Concession has been running in one form or another since 1997.

In mid-2006, the Government announced its intention to 'review' the concession and invited responses during a consultation period. Despite significant opposition, the Chancellor announced the end of the Concession in Budget 2008.

Strangely, on 27th March 2008, HMRC put out a document reviewing the responses received to their consultation on the changes. It was hardly a consultation, given that the decision had already been taken to withdraw the concession!

How will it affect agencies and clients?

As a result, from 1st April 2009, all recruitment agencies will have to charge VAT on supplies of temporary staff. Under the Concession, they only had to apply VAT on their agency fees.

Clients who are unable to reclaim VAT will effectively have to pay 15% more for the salary/wage element of their temporary workers, as well as the agency fees.

The change is expected to affect businesses in the finance, healthcare, education, charity and public sectors.

The Recruitment & Employment Confederation (REC) estimates that clients in these industry sectors currently save £400m annually as a result of the Concession.

HMRC expects the revenue yield in the first year of will be £125m and has suggested that only 5% of agencies will be affected.

It is clearly unknown how the change will impact recruitment companies, although clearly the money will have to recovered in some form. Most likely in the form of rate cuts, no doubt!

You can read HMRC's note on the withdrawal of the Staff Hire Concession here.