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Evening Standard - 26 July 1999

'VAT virus' may mean a cutback in City temps

by ROSS DAVIES

CITY institutions busy trying to beat the threat of the millennium bug now have to face a so-called 'VAT virus' as well.

Banks, insurance companies and other employers are preparing to replace large numbers of accounting, secretarial, technology and other temporary staff with full-time employees as business braces itself to pay millions of pounds in extra value added tax charges from the New Year because of Government plans to reclassify employment bureaux as employers rather than agents.

Steve James, VAT specialist at accountancy firm Arthur Andersen, said: 'This is an important change which drives up the costs of many City institutions quite substantially.'

Arthur Andersen is one of a number of accountancy firms advising big City employers on their individual exposure. Customs and Excise confirms that it means to go along with the Department of Trade and Industry's proposals to reclassify employment bureaux, which means VAT will be due on the full amount that agencies receive from clients 'including salary and associated costs'.

City employers will also be charged VAT on the secondment of full-time employees, a common practice among many big corporates where, say, a management company seconds a specialist to another operating company within the same group for a particular project and then bills for his or her services.

City employers are just becoming aware of the impact of the proposals, which will rope into the VAT net thousands of workers earning less than the 51,000 a year at which registration for VAT is compulsory.

'Many, if not most, financial institutions have staffed up with temporary workers hired through employment agencies as a way of cutting costs,' says Andersen's James. 'The problem is that the financial services industry is exempt from VAT and is therefore unable to reclaim more than a fraction of the VAT it currently pays on suppliers' charges.' Up to now, James points out, employers have had to pay VAT of 17.5% only on the commission charged by an agency, and not on the much-greater earnings of the temporary worker.

'This additional VAT burden is likely to reduce the demand for temporary workers and further increase costs for businesses in the City,' adds James.