Until the beginning of this month, recruitment agencies did not need to charge VAT on the wages of temporary workers when they were supplying organisations such as banks, charities and education providers.
The government’s decision to remove this concession will now add considerable cost to the use of temporary workers at a time when businesses can least afford it.
The Staff Hire Concession was introduced in 1997 as a temporary measure designed to provide employment businesses with a similar VAT treatment to that enjoyed by employment agents who also paid workers directly.
While the Treasury has maintained that the concession is illegal under European law, the Recruitment & Employment Confederation (REC) is concerned that the assessment into the effect of removing the concession has grossly underestimated its impact.
It is also surprising to see that no concrete measures have been put in place to mitigate the cost of the change to the public sector and charities which deliver services to some of the most vulnerable people in society.
What is clear, though, is that this decision comes during the worst economic downturn for generations and as such, is the worst possible time to add costs to the employment of people, especially when the jobs market is in such a fragile state.
So what impact will the removal of the concession have on employers and the way they use temps in the sectors most affected? In the banking and finance sector temporary workers are used in all positions from receptionists and call centre workers, to analysts and IT workers. These temps are often hired to cover sickness or specific short-term projects; and access to flexible staffing has become even more important as many companies are only able to plan in the short-term.
In the social care sector, it is estimated that 15% of care homes are operated by charities, who cannot recoup VAT. Temporary staff in this sector help ensure that elderly people receive the care they need on a 24/7 basis.
Budgets are extremely tight in social care and it is hard to see how many care homes will be able to continue to operate with the same levels of staffing without additional resources from government.
In social housing, temporary workers are used to provide services, such as care in sheltered housing and housing advice, as well as back-room services, including IT, accountancy and admin support.
For a sector that already operates to very tight margins and often relies on donations to cover basic services, the removal of the VAT Staff Hire Concession will have a considerable impact on the way that temporary staff are used and could have a direct impact on the services that they provide to vulnerable people.
In education there is a mixed picture; while schools have mechanisms for recouping VAT through local authorities, further and higher education establishments do not.
With temporary workers playing such a vital role in these sectors, it is important that employers do not have a knee-jerk reaction to the change in VAT charges and stop using temps altogether.
Temporary, interim and contract staff provide a valuable resource for businesses and organisations that need to grow and shrink their workforce to respond to market conditions.
They are also an important resource for businesses and organisations which might be cautious about recruiting people on permanent contracts in the current downturn.
The supply of flexible staff will also be vital when the upturn comes and companies will be looking to resource increasing demand. It is essential that temporary jobs are protected for this very reason. To ensure that there is a smooth transition during the introduction of the new VAT charges, the REC is working closely with recruitment agencies and employers so they can make the necessary adjustments and ensure that VAT is charged correctly on the supply of temporary staff from 1 April.
Anne Fairweather is head of public policy at the Recruitment & Employment Confederation