Will I have to pay more tax to employ temps?

We have recently been using temporary workers to help with our increasing workload. I’ve heard that I could have to pay more tax when employing the services of temporary staff agencies, is this correct?


A. Jonathan Russell of the UK200Group writes:

The rumours you have heard could relate to any number of changes which have taken place recently or are currently under consideration. Firstly, this could relate to changes to PAYE rules for employing temporary students which were introduced recently. Secondly there is the issue of holiday pay which was also introduced for temporary staff and has potentially increased costs.

However the fact that you have mentioned VAT leads me to believe you have heard about proposed changes to practices which are currently under discussion. Under a government review launched recently, the cost of employing temporary workers through an agency in the UK could rise for certain sectors.

This is due to a change in the value added tax (VAT) rule which is currently under consideration by HM Revenue and Customs (HMRC). The government review is presently considering whether the existing concession that exempts businesses from paying tax on payments to temporary workers should be abolished.

Currently, if a company pays the temporary worker, rather than the agency, VAT is not charged on company payments to temporary workers, only on commission charged by the temporary recruitment agency.

This concession is generally used by companies in the health sector who are unable to claim back VAT, and their staff agencies simply act as a “middle men”. Under the changes, any temporary workers from an agency must be paid by the agency, and not by the company.

Of course if the concession is withdrawn then the cost of UK businesses using temporary workers could rise signifi cantly.

The potential increase in costs does seem to go against the government’s praises for temporary workers and the contribution they make to the UK employment market. If the staff hire concession is abolished then companies are naturally much less likely to use temporary workers.

This also poses a risk to the flexibility of the UK employment market, as if VAT is charged on temporary workers’ salaries, businesses will use fewer temps, reducing the contribution that temporary workers make to UK competitiveness. This comes at a time when flexible working is becoming commonplace and many people are choosing temporary positions because they can fit in with personal commitments.

Recruitment companies themselves will also be adversely affected by the review. Agencies currently keep their client’s costs low by taking advantage of the existing tax relief and structuring their services to make the most of the concession. If this is abolished, it is going to lead to increasing problems for businesses and recruitment companies alike.

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