Colleges that recruit agency staff to give them flexibility will face an extra Pounds 20 million annual VAT bill between them from next month.
Under regulations coming into force on April 1, FE colleges will have to pay 15 per cent tax on the total agency wage bill, instead of paying tax on the agency fee only.
While schools have their VAT costs refunded through local authorities, colleges could see hundreds of thousands added to wage bills, with extra charges for employing agency lecturers, cleaners, security guards and other temporary workers.
Other public services, such as the NHS, have been granted an exemption so they can claim back any VAT paid on nursing or clerical staff.
The change could lead to some job losses in colleges. Recruitment agencies expect 25,000 temporary jobs in London to disappear in all industries as a result of the decision.
Colleges said it was absurd to introduce a tax on jobs just as the financial crisis meant unemployment was on the rise. The change was announced in the March 2008 budget.
Julian Gravatt, assistant chief executive of the Association of Colleges, said: "Ironically, one of the reasons you might contract out staff is to run flexible Train to Gain contracts. This is going to make that much more difficult."
Historically, making colleges pay VAT has been justified because they received extra funding to compensate. However, Mr Gravatt said studies showed that colleges received less funding than schools.
At Lincoln College, Ian Sackree, the vice-principal for corporate services, said it would cost his institution between Pounds 250,000 and Pounds 300,000 next year. Agency staff account for about Pounds 1.9m of the college's Pounds 22m wage bill, but Mr Sackree said they were crucial in some specialist areas. For instance, accountancy courses relied on visiting tax lecturers, he said. The college would lose their expertise if they left industry to teach full-time. He also said that such agency work had proved to be an effective introduction to teaching.