Changes to VAT treatment of temporary workers threaten to increase employment costs

Customs have published their comments (see Notes to Editors) on the long awaited regulations governing the conduct of the recruitment industry . 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.

ìThe changes could have particular consequences for recruitment companies that provide temporary workers. 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). A similar result is achieved by a VAT concession in relation to temporary workers that are provided on an employment business basis. Customs have now announced that they will keep to an earlier promise not to withdraw the VAT concession for employment businesses until at least 18 months after the change in employment law ñ which means 6 January 2006 at the earliest.

Nevertheless, the position is complicated and employment agencies that change to act as employment businesses as a result of the regulations need to ensure that their new arrangements fall within the existing VAT concession for employment businesses. This is not automatic and it may be necessary to introduce specific contractual terms to ensure continuity in the VAT treatment. Unless appropriate steps are taken there is a risk that VAT at 17.5% will be due on the total amount paid to the recruitment company by the hirer.