VAT increase

On the 4th January 2011 the rate at which VAT is charged increased from 17.5% to 20%. Effectively for recruiters, this means that the cost of your service has also increased by 2.5%. This is something that may not be welcomed by hirers, particularly those who operate in non VAT charging sectors such as the public sector, finance and charities. For these hirers the increase in VAT is simply a 2.5% increase in costs.

Employment Businesses are required to charge VAT on their entire charge, including amounts which are to be paid to an agency worker.  Where a hirer does not themselves charge VAT, then the VAT element of the costs paid to an employment business cannot be offset against any charges made by the hirer. This makes the usage of temporary agency workers more expensive than for VAT charging hirers and is therefore likely to have an adverse impact on the use of recruiters by organisations within such sectors.

Prior to 2009, organisations that do not charge VAT were able to benefit from a reduced VAT charge for supplied agency workers by agreeing with a recruiter that the VAT staff hire concession applied. This concession allowed the recruiter to supply and pay a worker, yet be considered to be acting as agent for the client for payment purposes. This meant that the hirer was charged VAT only on the margin element of the recruiter’s fee, not the entire amount payable. This concession was withdrawn in 2009, one of the stated reasons being concerns that the concession may not be compatible with EU legislation.

All VAT legislation across Europe derives from a European directive. However in December 2010 the EU commission launched a consultation on the future of VAT, specifically to consider whether the existing legislation needs to be modernised and to ascertain if the system can be simplified and made more efficient, included within this consultation are specific questions on the VAT treatment of the public sector and exemptions for certain activities or sectors. Whilst the green paper is at this stage simply an opportunity for the matter to be discussed and debated changes in EU legislation, could remove any bars to the reinstatement of the VAT staff hire concession.  

We understand from the Association of Recruitment Consultancies that it plans to continue to campaign for the re-instatement of the VAT staff hire concession or other changes to regulations that would help reduce VAT charges where using temporary labour. These changes would provide for a fairer position and would be of benefit to the public sector, at a time when finances are stretched and cutbacks being made.