Experts at accountants PKF in Birmingham say the decision to withdraw the staff hire concession from April 1, 2009, could see businesses paying up to 500 per cent more VAT to engage temporary staff.
The concession allows the employment bureaux supplying temporary staff to charge customers only on the margin made, allowing the wages element of the fee to be free of VAT, as long as the client was responsible for paying the workers direct.
Tony Bartle, PKF’s senior VAT manager in Birmingham, said: "This is very bad news for a large number of businesses which are unable to reclaim all their VAT, for example banks, insurers, nursing homes, private hospitals, private schools and colleges, universities and charities.
"The Government says that it is giving 12 months’ notice of the change to allow businesses to prepare for it, but it is hard to see what can be done to avoid the costs. The only way around this would be to employ temporary staff directly, but the employment law costs involved in doing this are such that most will prefer to take the VAT hit instead.
"The Government has estimated that the concession currently saves UK businesses and NGOs some £255 million in total. I think this is an underestimate and some businesses could see a 500 per cent rise in the costs of hiring temporary staff."