What is the Staff Hire Concession?
After threatening to do so for a number of years the Government finally announced at the 2008 Budget that the VAT staff hire concession (the “Concession”) would be withdrawn with effect from 1 April 2009. The Concession was introduced as a temporary measure in 1997 to prevent the distortion of competition between employment agencies (“Agencies”) some of which were benefiting from VAT-free arrangements.
The Concession allowed Agencies to charge VAT only on their profit margin on the supply of temporary or self-employed workers (“Temporary Workers”) to other businesses. However, after a public consultation HM Revenue and Customs (“HMRC”) decided that the Concession was contrary to EU VAT law and should be withdrawn. From 1 April 2009 onwards VAT must now be charged on the gross value of any supplies of Temporary Workers, including the Agency’s profit margin, the wages and holiday pay of the Temporary Worker and any national insurance and pension contributions payable by the Agency.
Who does the withdrawal of the Concession affect?
The withdrawal will affect Agencies, Temporary Workers and any businesses paying for Temporary Workers (“Placement Businesses”). Agencies will have to adapt their accounting and VAT invoicing procedures to take account of the new VAT treatment. As the Concession has had “temporary” status for over ten years this may cause some headaches if a VAT manager has never known a VAT regime without the Concession. In addition, the Agencies will have more cash coming in and out of their accounts as they receive from customers and pay to HMRC greater amounts of VAT.
Placement Businesses that are VAT registered and that can recover all of their VAT in full will only be affected to the extent that they may have to pay more VAT for the supplies of Temporary Workers. This will cause a cash flow difficulty but there will be no effect on the business’ profitability. However, Placement Businesses that make VAT-exempt supplies (for example, businesses operating in the finance or education sectors) or that can only recover part of their VAT, for example the charity sector, will suffer increase labour costs as they will be paying more VAT that cannot be recovered. This may lead to Placement Businesses reducing the number of Temporary Workers they use to make costs savings.
Placement Businesses could, if their contracts with Agencies allow, require this additional VAT to be absorbed by the Agencies. However, whether or not this happens depends on the respective parties’ bargaining positions. Agencies that make the majority of their supplies to VAT-exempt Placement Businesses may be forced to absorb the additional VAT within their existing margins in order to retain their current contracts. The only silver lining for the Agencies and Placement Businesses is that the reduced VAT rate of 15% will continue until the end of 2009.
That will be of little consolation to Temporary Workers, however, who could be squeezed from both sides. Placement Businesses may reduce the numbers of Temporary Workers they use as a result of the additional VAT burden. Agencies may reduce the amount of Temporary Workers they hire out and choose to focus on placing permanent workers instead. In either case, the number of temporary positions will be reduced.
Are there ways of mitigating the effect of the withdrawal?
Agencies should now charge VAT on the full value of any supplies of Temporary Workers that the Agencies continue to employ or pay directly. HMRC have indicated that any contractual arrangements under which an Agency attempts to circumvent this VAT treatment by acting “as agent” rather than “as principal” where the Temporary Worker still remains on the Agency’s payroll will be subject to scrutiny. Before the Concession was withdrawn Agencies using such arrangements were able to charge VAT on their profit margin but they should now consider whether or not it is worth risking an HMRC enquiry or dispute.
However, if the Agency also makes supplies of permanent workers or of Temporary Workers who are employed and paid directly by the Placement Business the Agency can continue to charge VAT only on its commission or fee. An Agency that supplies both Temporary Workers and permanent workers may wish to consider separating the two business lines so that it is clear which elements of its supplies are subject to VAT and which are not to head HMRC off at the pass.
Agencies that now have to charge greater amounts of VAT as a result of the Concession being withdrawn may also be able to arrange their VAT invoicing in such a way as to manage the VAT cash flow position efficiently. Placement Businesses may also be able to make similar arrangements with the Agencies to receive VAT invoices at certain times that would also give them a cash flow advantage.