New tax rules on temps to hit recruiters

LONDON (Reuters) - Plans to change tax rules to make companies pay VAT on the wages of temporary workers could lead to the loss of tens of thousands of jobs and dent the profits of recruiters as firms cut back on part-time staff.

The staff hire concession, which will be withdrawn by the government on April 1, enables employment agencies to charge Value Added Tax VAT.L on their fees and not workers' pay in some sectors, but from next month VAT will be due on the full amount received for the supply of temps, including wages.

The proposed change means that all employers will have to pay 15 percent VAT on the total cost of hiring temps.

"It will clearly lead to fewer contracts and less fees for us which will impact profitability," said Paul Venables, finance director of Hays (HAYS.L), the country's largest staffing group.

"There's a potential risk that 75,000 jobs could be lost. You could have a situation where there are 30-40,000 jobs lost in the London area over the next five or six months as a direct result of a piece of legislation the government's put in place."

The change to legislation will affect sectors that are not currently able to claim back VAT on expenditure, including financial services, healthcare and charities.

Children's charity Barnardo's has warned that its services will be hit by the withdrawal of the concession.

"Like many charities it is necessary for us to make use of temporary staff and the additional cost (caused by the change) could mean we are unable to deliver the same level of service to the children and families we already work with," said Chris Hanvey, Barnardos' UK Director of Operations.

EXTRA VAT BURDEN

Domestic recruiters are concerned that the extra VAT burden will make public bodies which rely on contract staff view temps as too expensive and force them to cut back on hiring.

The supply of GPs is one area set to bear the brunt of the changes as doctors' surgeries, often run as businesses, shift to using VAT-exempt private direct hires rather than agencies.

"I would estimate an erosion of the bottom line anywhere between 30 and 50 percent depending on how we structure it," said Salim Shahul, Chief Executive of dr-locums, a privately held specialist doctors' recruitment agency.

The change could also lead to a huge reduction in London's office temps -- already being cut back as the recession bites -- especially those in the battered financial services sector.

Hays and Michael Page (MPI.L), the country's top two recruiters, generate around 50 and 25 percent of their fees, respectively, from temporary placements, with roughly half of that coming from their activities in the financial services sector.

Hays, which has lost a third of its value in the last year, is now worth just under 1 billion pounds, while Michael Page, which shed a quarter of its value in the same period, is worth just over 600 million pounds.

"The next year is going to be dire and this is factored in to recruiters' prices now, but if things were more stable I'd say there would be a price reaction because of the VAT change," said KBC Peel Hunt support services analyst Henry Carver.

Hays generates 20 million pounds of net fees each year from temporary workers placed under the VAT staff hire concession.

"Some of that will continue, some will continue at a lower margin, and some of that will disappear," said Hays' Venables.

Hays, Michael Page, and smaller rival Robert Walters (RWA.L) have each reported declining profits in the last month as the industry struggled against the impact of the global economic downturn and rising unemployment levels.

Rising demand for temporary staff had partially offset falling income from permanent placements but this trend could be halted by the new tax rules.

Robert Walters' finance director Alan Bannatyne believes the new legislation is "very unhelpful" in the current climate.

"I don't think it's a good move. Recruiters should apply VAT to the introductory service, not the worker," said Bannatyne.

The Recruitment and Employment Confederation REC.L, a trade body, believes the change will cost employers around 400 million pounds annually and 15,000 temporary staff will be affected.

"Less revenue and jobs will be the impact. Our members are seeing clients starting to cut the numbers of temps in preparation for this change and the jobs aren't going anywhere," said Anne Fairweather, the REC's Head of Public Policy.

Shares in Hays, Michael Page, and Robert Walters are currently underperforming other support services stocks.

Hays is trading at around 8.9 times forecast earnings for 2009, with Michael Page at 6.2 times and Robert Walters at 4.7 times, compared with a price-earnings ratio for the FTSE All Share Support Services Index .FTASX2790 of 10.7, according to Reuters data.

(Editing by Matt Scuffham and Jon Loades-Carter)