Legal Q&A: Changes in VAT on temps
Alan Brooks, senior tax manager, and Stephen Chaffey, solicitor, Dundas & Wilson, discuss how employers are affected by the change on 1 April 2009 to the VAT charged by employment businesses who supply temporary staff.
Q What does the VAT change mean for employers?
A Staff Hire Concession arrangements in respect of temporary staff supplied by “employment businesses” (as opposed to “employment agencies”, which find staff who are then employed directly by their clients) have been withdrawn by HM Revenue & Customs. This arrangement had allowed employment businesses to charge VAT only on the commission element they charged for the supply, rather than the full cost of supplying the temporary staff, including their wages and other benefits. Its withdrawal is likely to significantly increase the costs of using temporary staff for employers that cannot fully recover VAT.
Q What types of employers will this affect?
A The greatest impact will be on those using employment businesses for the supply of temporary staff that cannot fully recover the VAT charged to them. There are no exemptions.
Q How do the new rules apply to casual staff hired directly?
A The concession is only relevant where temporary staff are supplied by an employment business, and so its withdrawal will have no impact on the treatment of casual staff hired directly.
Q What can affected employers do about it?
A If you have not already planned for this, then you should start discussions with your preferred employment businesses. Employers should consider if they can negotiate adjustments to their existing contracts, so as to ascertain whether there is any way the increase can be apportioned between them. They could also discuss ways to defer or spread the increased VAT costs over the forthcoming financial year.
Q What other factors should employers consider?
A This is an opportunity for employers to re-evaluate their staffing needs and long-term employment policies. Although the flexibility of temporary staff has its obvious attractions, these might be diminished by a significant increase in cost. While there are obvious financial constraints, it might be time to consider whether there is an advantage in using temporary staff.
Q What are the advantages of using temporary staff?
A The advantages of using temporary staff stem from the flexibility and cost effectiveness that can arise from being able to draw upon an existing pool of available workers. The employment business undertakes the recruitment directly and will typically indemnify end users for employment claims that may be brought by the individual, permitting businesses to effect changes quickly.
Q Are temporary staff rights increasing?
A It looks that way: they already benefit from the protection of working time legislation and the national minimum wage, as well as other protections such as health and safety and social security provisions and anti-discrimination legislation. In October 2008, the European Parliament approved the Temporary Agency Workers Directive, and the UK has three years to implement it. The main thrust of the directive is that temporary staff should receive equal treatment in terms of basic working conditions relating to pay, holidays, maternity leave etc (but excluding pensions), as if they were employed directly by the end user. In the UK, this protection will kick in after 12 weeks from the start of a temporary staff member’s placement.
Q What about planning for employers’ longer-term staffing needs?
A There is a move towards equality of treatment between temporary staff and permanent staff. Planning for the longer term, it is worth looking at the costs (which may mean additional administrative support costs) and risks that may arise from engaging staff directly on fixed-term or permanent contracts, or perhaps covering short-term staffing needs through overtime. Permanent employees currently only accrue unfair dismissal rights after completing a one-year period of continuous service, which potentially makes them as easy to dismiss as temporary staff during the same period.
