The government has downplayed recruitment industry concerns that removing VAT concessions on staff hire next year could cost employers in excess of £100m and compromise the flexible workforce.

The Chancellor, Alastair Darling, announced staff hire concessions, which exclude wages from VAT calculations and taxes only the commissions charged by employment agencies, will be withdrawn from April 2009.

A spokesman for HMRC (Her Majesty's Revenue and Customs) said one of the reasons for removing the concessions was because it was contrary to EU law.

He told Recruiter: "It was only introduced as a temporary measure 10 years ago and by rights it should have been withdrawn before because it was a tax avoidance scheme.

"The majority of VAT is easily recoverable and the NHS can reclaim the VAT anyway even down to what has been supplied. In effect it is more of a bookkeeping exercise.

"It only affects less than 5% of agency work across the board — it is not something that is going to have a mega impact."

The spokesman added that "virtually all" the organisations using staff hires have restructured their operating systems, so the concessions are "obsolete".

However, Ann Swain, chief executive of the Association of Technology Staffing Companies (ATSCo), told Recruiter removing the concessions, which were "fair and appropriate", downplayed their significance in the industry.

"The government again speaks with forked tongue about its support for flexible workers while adding barriers for employer businesses, realistically making life difficult again for umbrella contractors.

"Make your mind up. It is highly detrimental to the recruitment sector and highly detrimental to business."

Blake Lapthorn Tarlo Lyons' advice to ATSCo members was that removing the concessions might not mean the end of VAT efficient supply arrangements.

Its member briefing said: "The High Court decision [in the Reed case] means that as far as payments received by the worker are concerned, the staffing company is deemed merely to be acting as the end user's agent for VAT purposes. VAT is chargeable on the margin charged by the staffing company but the rest of the charge has a different VAT status (ie. VAT is generally not chargeable in respect of the element of the staffing company's charge which is paid on to the worker).

"Until the Reed case is overturned by the Courts we consider that technically the 'agency' VAT mitigation model may not be unlawful even after the Staff Hire Concession is withdrawn."