Recruitment agencies could be running up huge backdated VAT bills while Customs & Excise resolves long-standing ambiguities in the tax rules relating to temporary workers.

Customs & Excise has now extended the so-called “staff hire concession” for employment businesses. Introduced in 1998, this allows employment businesses which place temps with clients but employ staff directly to avoid VAT on the wages element of their charges, which is then paid directly by the client. This puts them on a par with employment agencies.

However, Debra Dougal, VAT manager at accountancy firm Moore Stephens, warns that agencies may misinterpret the rules and lay themselves open to massive VAT charges. “The regulations are so badly-worded that customs haven’t got on top of this issue,” she said.

“I’ve worked for clients where customs have said you need to pay VAT on all of this – the client not having paid VAT on any of it – and the client has no way of collecting it.”

In other cases agencies are charging too much, not realising that they need only charge VAT on their commission.

“Agencies need documentary evidence, contracts that clearly state the agency fee, the disbursements, the holiday pay and so forth – it can’t all be wrapped up in one figure,” said Dougal.