Employers using temporary workers will have plenty to think about over the next year or so with both:

  • the arrival of a new EU directive; and
  • the anticipated removal of the VAT staff hire concession.  

Extra rights under EU Directive  

On 21 October 2008, the European Parliament approved a controversial directive putting temporary workers on equal terms with their “regular” colleagues regarding pay and working hours. This will give new rights to Britain’s 1.3 million agency workers.

The Directive had been blocked since 2002, mainly due to UK concerns. The agreed text is a compromise between the European Parliament and national governments and, whilst it retains the principle of equal treatment from day one of engagement, derogations are permitted provided that there is agreement between social partners.

The Directive will need to be implemented in member states within three years. It will harmonise EU-wide legislation on temporary workers, which varies considerably between member states.

Once the Directive is in force, subject to any qualifying period, agency workers will be entitled to the same basic working and employment conditions as their permanent colleagues. In practice, this will include breaks, holidays, pay and potentially access to staff facilities such as canteens and childcare and training. The revised wording of the Directive will allow the UK to implement an agreement between CBI and TUC which provides for a twelve week qualifying period of service before those rights are triggered.

BERR has announced its intention to introduce implementing legislation in the course of 2009.

A VAT headache  

The other development which affects temporary agency workers is the anticipated removal (with effect from 1 April 2009) of the VAT “staff hire concession” (SHC), which currently allows the pay of temporary workers (as opposed to the margin payable to the provider of the temporary worker) to be outside the scope of VAT. After April 2009, the temporary worker’s pay will attract VAT as part of the provider’s invoice to the end-user.

For users of temporary workers who suffer irrecoverable VAT (notably banks, local authorities and charities), withdrawal of the SHC represents a significant additional expense (slightly ameliorated by the recent reduction in VAT from 17.5% to 15%).

Many businesses find it attractive to engage temporary workers because of the flexibility of the relationship – and the fact that they do not impact on core headcount. Particularly in the current recession, the withdrawal of the SHC will be damaging to UK PLC, and may result in the “export” of activities which would previously have been done here. Nevertheless, the withdrawal of the SHC is consistent with EU law, and will put the UK on a “level playing field” with other EU members.

Businesses which will be affected – particularly those in the financial sector – are looking at various ways of mitigating the VAT cost. In summary:

  • in some cases it will be appropriate to maintain the status quo, and accept that there will be irrecoverable VAT. The main examples are where there is a short term need – where the extra VAT cost is worth taking on the chin in return for the flexibility offered;
  • artificial avoidance techniques (such as joint venture companies and dual employment structures) are unlikely to be an effective means of avoiding VAT;
  • a wider range of temporary workers may wish to provide their services through a personal service company – and this is beneficial where the value of the PSC’s turnover will be below the VAT registration threshold. This may be attractive in some cases, but care is needed – especially where the structure is used in circumstances where the worker is at risk of being found to be an employee applying the standard legal tests;
  • businesses will need to look more carefully at the possibility of employing the worker direct (so that the provider simply act as an introductory employment agency for legal purposes). Under this route, no VAT charge arises. For many employers, this solution is unattractive because it negates some of the key advantages in using temporary workers in the first place. However, this may be the best way forward in many cases. Affected businesses need to go through the complex exercise of identifying the tangible and intangible costs of giving employment status to temporary workers – and weighing up that cost against the irrecoverable VAT. One item to bring into the balance is the fact that the implementation of the Directive will in any event narrow the gap between agency workers and employee status and so many make this approach more palatable.