The government department recently launched a review of whether a concession that exempts organisations from paying VAT on payments to temporary staff should be abolished.
Currently, if an end user of employees rather than the staffing agency pays its temps' fees, either directly or through a third party payroll business, VAT is not charged on those payments, but only on the commission charged by the staffing agency.
Ann Swain, chief executive of the Association of Technology Staffing Companies (ATSCo), warned if the so-called "staff hire VAT concession" is withdrawn, the cost to UK businesses of using temps could rise by millions of pounds.
Among the organisations which could be affected are banks, insurance companies, charities and schools.
"The government is forever praising the contribution temporary workers make to UK competitiveness, but if VAT is charged on temps' salaries, organisations will use fewer temps, and the flexibility of the UK labour market will be compromised," she said.
Frances Lewis, from law firm Tarlo Lyons, added: "A number of large recruitment companies help keep their 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."
HMRC's review of the concession ends on 31 August. You can view the consultation at www.customs.hmrc.gov.uk.