Employers prepare for temporary worker tax hike

The economy is heading for a downturn and unemployment is threatening to climb. So why is the Treasury introducing a new tax hit that looks likely to increase unemployment numbers?

That is the question some are asking, as one of the more perplexing decisions of the 2008 Budget faces widespread criticism.

NHS trusts, the financial sector and charities are all preparing for a massive tax hike after the government decided to raise the cost of employing temporary staff.

The issue is about VAT on the costs of employing temps. Up to now agencies benefited from a concession that meant they only charged VAT on the fees they charged employers for the temps.

But from April 2009, they will pay VAT on the full salary of the temp as well.

Sue White, of the Public Sector Tax Forum, says the difference might be between paying VAT on £500 of a doctor's salary and agency costs, rather than solely on the £100 portion of that charged by the agency.

The NHS already pays £10m in VAT on agency staff. 'I would expect [the extra cost] to be more than that,' says White.

Budget figures estimate a haul of £150m in 2009, and £125m in 2010.

So why is the government dropping the 'staff hire concession'?

HMRC says the move was a temporary measure. In 1997 there was a discrepancy in the tax treatment of different kinds of employment agents, and the concession was introduced to create a level playing field. That has now been ironed out through changes to separate pieces of law, and now all agents will pay the full tax.

It also says it has to make the move to be consistent with EU law, and that it will counteract some forms of tax avoidance.

But even so, it couldn't really have come at a worse time.

'The issue has been rumbling on for years, but this is a very bad time to be doing it,' says White.

The Recruitment and Employment Confederation have been even more damning. Apart from the obvious costs, it adds: 'The cost of agencies to change their invoicing systems has been woefully miscalculated.'

White says the consultation was one where government appeared to 'decide in advance what it wanted to do.'

The NHS is now looking at costing the impact of the move. Might we, in due course, see yet another policy u-turn from the calamitous Budget of 2008?