Changes to VAT treatment of temporary workers threaten to substantially increase employme...


Employment agencies should act now to review their position, says Deloitte.

Customs have published their comments 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.

'Recruitment companies that provide temporary workers could be particularly effected by these changes. 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 - which means that they will be responsible for all payments to the worker, including holiday pay and other benefits,' comments Rob Coles, VAT director 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 - 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.

'Without appropriate restructuring there is a risk that the costs of hiring temporary workers will substantially increase for certain types of hirers who are unable to recover all the VAT they incur,' comments Rob Coles.

'This could adversely impact the financial services sector as well as the health and education sectors, which all rely on substantial numbers of temporary workers. We would advise employment bureaux that are moving from agency to business arrangements, as a result of the regulations, to take tax and legal advice to ensure continuity in the current VAT treatment.'


The Deloitte Cambridge office comprises 8 Partners and over 250 staff who deliver a full range of professional services to the East Anglian region. As well as focussing on the life sciences and technology sectors for which the region has become so renowned, the office has long standing specialisms in other sectors including the professions, consumer business, food and agribusiness.

Deloitte LLP