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Andrew Needham, Director of VAT Solutions (UK) Ltd, warns that the withdrawal of a concession may mean increased VAT costs for employment businesses from next year.

Andrew Needham

'Employment Businesses'

Within the small print of Budget 2008, HMRC announced the withdrawal of the staff hire concession for ‘employment businesses’ from 1 April 2009. Under this popular concession, employment businesses have been able to charge VAT only on their commission, provided that the recipient of the staff paid the worker directly, and also paid the relevant PAYE and NI directly to HMRC. 

This concession has been of particular use to organisations that are unable to reclaim some or all of the VAT they incur, such as charities, nurseries, care homes, and other exempt entities with a social welfare basis. HMRC have said that the relatively long lead in time is to allow affected organisations to plan for the potentially increased cost. If you have been making use of this concession, you need to be aware of the increased VAT costs from next year.

'Non'-Employment Businesses - Concession Survives

The only bright note is that HMRC have at least confirmed that the separate concession applied to organisations ‘other than employment businesses’ will continue to be available.  This concession allows organisations seconding their staff to another organisation to not charge VAT provided:

• The other organisation controls the allocation and performance of the employee’s duties during the period of the secondment
• It pays the worker directly
• It pays the PAYE and NI directly to HMRC
• It makes no financial gain from the secondment

This can be a valuable concession, although it does increase administration for the recipient organisation.

Recruitment Sector Reaction

As an example of how the recruitment sector reacted to the withdrawal news, Fiona Coombe, Director of Professional Services at the ‘Recruitment and Employment Confederation’, commented as follows on the REC website:

“The REC has presented a great deal of evidence to HMRC on the impact of the withdrawal of this concession.  The regulatory impact assessment conducted by HMRC on this issue fails to assess the financial impact for the client organisations which will now have to find an extra £125 million a year to pay the VAT. 

The cost of taking on vital temporary staff will rocket in sectors where they cannot reclaim the VAT charged to them.  This includes vulnerable sectors, such as charities providing healthcare and social housing.  Within the NHS, it is also likely to cause a cash flow problem as charges will increase on placing locum doctors.  The cost of agencies to change their invoicing systems has also been woefully miscalculated.
 
This massive change will need to be explained to clients, an additional cost to the recruitment sector.  We will be taking up these concerns with HMRC.”