Additional guidance published on the VAT treatment of temporary workers

Customs have published (22/3/04) additional guidance on the VAT impact of the long awaited regulations governing the conduct of the recruitment industry. This guidance is in addition to comments made in January. The new regulations are intended to establish a framework of minimum standards for work-seekers and hirers and are due to be effective from 6 April 2004, although a transitional period will operate until 6 July 2004.

ìRecruitment companies that provide temporary workers could be particularly affected by these changes. The intention of the regulations is to ensure that recruitment companies that directly or indirectly pay temporary workers act on an employment business basis rather than on an employment agency basis. As an employment business, a recruitment company will be responsible for engaging the temporary workers under a contract for services or a contract of employment ñ which means that they will be responsible for all payments to the worker, including holiday pay and other benefits,î comments Kendra Hann, VAT partner at Deloitte.
At present, recruitment companies that provide temporary workers to hirers on an employment agency basis are only required to charge VAT on their commission. Wage related payments are usually VAT free, which is beneficial if the hirer is unable to recover all the VAT they incur (as a result of VAT exempt and/ or non-business activities). The regulations are expected to result in many bureaux starting to operate on an employment business basis. Where bureaux employ temporary workers, Customs announced in January 2004 that the ístaff hire concessioní (see note to editors) will continue to be available to employment businesses until at least 18 months after the change in employment law ñ which means 6 January 2006 at the earliest.

With the additional guidance published this month, Customs have confirmed that where bureaux contract with self-employed work-seekers on an employment business basis, they can choose to continue to account for VAT only on their margin rather than on the full value of payments made by hirers. To make this election, the bureaux will need to separately show their íprofití on invoices.

ìThis is a welcome announcement from Customs. The extension of the concession to the provision of self-employed temps by employment businesses means that less restructuring will need to be undertaken by bureaux to achieve a VAT efficient result,î comments Kendra Hann. ìIt is also good news for businesses that are unable to recover all the VAT they incur on costs (as a result of VAT exempt and/ or non-business activities). In particular, the financial services sector is expected to benefit as well as the health and education sectors. These sectors rely on substantial numbers of temporary workers and should continue to incur VAT only on the commission made by the bureaux and not on the wage related payments.

ìWe would advise employment bureaux that are moving from agency to business arrangements, as a result of the regulations, to take tax and legal advice to ensure continuity in the current VAT treatment. Unless bureaux take appropriate steps to ensure that they fall within one of the VAT concessions, there is a risk that VAT at 17.5% will be due on the total amount paid to the recruitment company by the hirer.î