The United Kingdom recently raised taxes on goods and services to 20 percent from 17.5 percent and, given pressure on public finances, it wouldn't be surprising if governments in other parts of Europe also try to improve the public coffers by nudging up their VAT this year.

Until April 2009, U.K. VAT charges on agency workers were not too much of a concern for companies using staffing services because, through what was called the 'Staff Hire Concession,' staffing suppliers were allowed to charge VAT only on their margin rather than on the total billing (i.e., VAT was not charged on the amount paid to the temporary workers).

The Concession was withdrawn in the UK and then the Haderer and Stichting case in the European Court of Justice made it applicable across the whole EU. (See http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:62005C0445:EN:HTML).

While many businesses are able to claim back VAT charges, banks, building societies, insurers and other financial services companies cannot recover all the VAT charged to them. When the Staff Hire Concession was withdrawn, costs to this group of employers increased by about 15 Percent, making potential increases in VAT that much more of a concern.

Not surprisingly, therefore, some large financial employers (especially those with a strong employee brand) are considering setting up their own in-house agency to directly engage temporary workers. Or to sub-contract the running of an in-house agency to a staffing company or other third party -- in which case the employer would only be liable for VAT on the management fee charged to them.

This model has other advantages aside from the VAT mitigation. First, the upcoming Agency Workers Directive would not apply. Second, agency margins may be reduced. And third, the employer can control income tax and social insurance compliance while, at the same time, operating tax efficient expenses schemes.

Despite these advantages, there are some potential negatives and risks to consider. The creation of a new in-house entity might be contrary to some companies' strategy to simplify rather than complicate their corporate structures. The in-house agency would have to comply with staffing legislation (such as the U.K. Conduct of Employment Agencies and Employment Businesses Regulations 2003) at a time when many businesses are seeking to lessen their regulatory burden.

Further, running an in-house agency could raise the risk of employment and discrimination claims and, where full-time staff have noticeably better benefits and pensions, expose the employer to class-action discrimination claims. Those that want to outsource the running of an in-house agency to a third party would also face substantial set-up costs. As a result, they would need guarantees from providers that they will recoup these costs.

Choosing the right path for your company will be a matter of balancing your appetite for risk with your appetite for cost savings. Her Majesty's Revenue & Customs (HMRC) will no doubt be keeping a close eye on such schemes, so employers should seek expert legal advice to ensure they are structured appropriately. Further, while VAT increases may cause come companies to reconsider this issue, at a time when the financial sector is still suffering reputational issues, initiatives that may be perceived by the public as tax avoidance may not be in an employer's best interest, whether the HMRC deem them legal or not.