The 2.5% cut in VAT will hit the recruitment industry’s cash flow hard, warn recruiters.

John Hailstone, managing director of multi-sector recruiter First People Solutions Group, told Recruiter that many staffing agencies using factoring agreements through invoice finance companies rely on VAT to help with their cash flow until they have to pay HM Revenue and Customs (HMRC) at the end of the quarter.

“Imagine you have to send out an invoice for £1,175 — £1,000 plus 17.5% VAT. Now you will only get £1,150 or 15% VAT and you have the invoice company drawing money down on that invoice,” he said.

Hailstone added that many companies have to wait 40 days plus for debtors to pay their invoices and rely on the VAT money to pay contractors.

“We are obviously not benefiting from the VAT money because we have to pay the Inland Revenue at the end of the quarter but it is going to affect the available cash that many recruiters who pay through invoice financing are able to use. There will be a lot of agencies suffering as a result,” he said.

Albert Ellis, chief executive of Harvey Nash, said that although the VAT would not help cash flows, it may help zero-rated VAT or exempt firms like banks and insurance providers, or public sector clients who might be able to pass on some savings.

“The high end, highly productive recruiters are also going to be hit hard by the 0.5% hike in National Insurance contributions and the new income tax bands for those earning above £100,000 and £150,000,” he added.

Meanwhile, Kevin Barrow, partner in employment law firm Blake Lapthorn, welcomed the government’s decision not to ban tax breaks on travel and subsistence claims for contractors on overarching contracts of employment through umbrella or staffing companies.

He said: “We expect that HMRC will continue to look carefully at expenses claims by umbrella service providers. The ongoing review and (in some cases) revocation of scale rate dispensations operated by these providers will not be halted by this announcement.”