Banks, insurances companies, healthcare institutions and charities that use temporary staff are amongst a range of companies facing an increased VAT bill following the announcement yesterday from HMRC that the Staff Hire Concession (SHC) will be removed, with effect from 1 April 2009.  The Treasury estimates that the withdrawal of SHC will cost business in the region of £200 million a year.

The SHC allows employment businesses, specialising in temporary staffing, to supply their employees as temporary workers to clients and only charge VAT on their commission or agency fees.  This means that businesses classified as exempt or non-business clients such as charities do not suffer a VAT charge on wage payments.

Helen Devenney, Director in the Indirect Tax team at Deloitte, said: “This change will result in a wide range of businesses facing significantly increased costs when using temporary workers.  It will also have a considerable impact on the flexibility of the labour market as temporary workers will become much more costly than permanent employees.”

The SHC was introduced to level the playing field in the temporary workers market.  The Reed case in 1995 established that employment agencies (i.e. who had no contractual relationship with workers) only needed to account for VAT on their commission.  Without the SHC there was a risk that employment businesses employing their workers would need to account for VAT in full, thus leading to a distortion in the market.

HMRC's view is that the Conduct Regulations introduced in 2003 required most providers of temporary workers to operate the same business model for the first time (i.e. contract with workers).  Therefore, in their view, VAT is legally due on all payments collected by these businesses and there is no distortion in the market.  For this reason, they believe the SHC has become redundant.

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