New rules governing VAT and the hiring of temporary staff could have an impact on the way businesses employ people, it has been claimed.

At the moment, the rules allow employment agencies to charge VAT solely on the commission element rather than on the whole cost of placing a temporary worker.

This helps those organisations that rely on the supply of temps but cannot reclaim VAT.

However, a measure in the Budget will see the staff hire concession withdrawn as from April 2009, which means that the full cost of taking on temporary workers will be subject to VAT.

The result could make the cost of taking on temporary staff prohibitive in certain sectors, employment bodies have warned.

Ann Swain, chief executive of the Association of Technology Staffing Companies, said: “If organisations have to pay VAT on temps’ pay and not just the recruiters’ margin, the cost of using temps is going to rise significantly. The government is forever praising the contribution temporary workers make to UK competitiveness but, if VAT is charged on fees, organisations may use fewer temps and the flexibility of the labour market will be compromised.”

Fiona Coombe, director of professional services at the Recruitment and Employment Confederation, commented: “The REC has presented a great deal of evidence to HM Revenue and Customs on the impact of the withdrawal of this concession. The regulatory impact assessment conducted by HMRC on this issue fails to assess the financial impact for the client organisations which will now have to find an extra £125 million a year to pay the VAT.”

Ms Coombe added: “The cost of taking on vital temporary staff will rocket in sectors where they cannot reclaim the VAT charged to them.”