The recruitment industry is reeling from the government's Budget decision to remove value added tax concessions on the hiring of temporary workers from April 2009.

The Chancellor announced that staff hire concessions, which exclude wages from VAT calculations and which taxes only the commissions charged by employment agencies, will be withdrawn from April 2009 to raise £275m for the Treasury.

Recruitment professionals and business leaders are warning the move could cost employers more than £100m and compromise the flexibility of the labour market.

The Recruitment and Employment Confederation (REC) said the concession, which has been in place since 1997, was "vital for recruitment agencies supplying staff on a temporary basis to organisations such as banks, financial institutions, charities, private hospitals and care homes which cannot reclaim the VAT charged to them".

Fiona Coombe, the REC's director of professional services, said hiring costs will "go through the roof".

She told Recruiter: "The regulatory impact assessment conducted by Revenue & Customs on this issue fails to assess the financial impact for the client organisations, which will now have to find an extra £125m a year to pay the VAT. This includes vulnerable sectors such as charities providing healthcare and social housing. Within the NHS it is also likely to cause a cash flow problem as charges will increase on placing locum doctors. The cost of agencies to change their invoicing systems has also been woefully miscalculated."

The Confederation of British Industry said the VAT changes would "damage labour flexibility and undermine the government's own goals for employment".

Ann Swain, chief executive of the Association of Technology Staffing Companies (ATSCo), told Recruiter that the government had made a "serious mis-judgement" which could result in companies rethinking their staffing strategies.

"If organisations have to pay VAT on temps' pay and not just the recruiters' margin, the cost to UK plc of using temps is going to rise significantly."

Swain said that despite the Labour Party praising the contribution temporary workers make to UK competitiveness, the move will "seriously compromise" the flexibility of the labour market.

"Recruitment companies help to keep clients' costs down by structuring their services in ways that take advantage of the current VAT concession. For them, an abolition of the concession could prove a real headache," she added.