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The Treasury has "grossly underestimated" the cost of imposing VAT on the wages of temporary social care and charity workers, locum doctors and financial services staff and if it pushes ahead it will lead to significant job losses, the recruitment industry has warned.

The measure, announced by Alistair Darling in March, will withdraw a concession granted in 1998 to agencies supplying temporary staff in industries that are zero-rated for VAT. It will force agencies to charge VAT to their customers, including NHS Trusts and charities, which they cannot reclaim.

The Treasury said the reform, which will take effect next April, will raise £125m a year. But in a new study, handed to Jane Kennedy, the chief financial secretary to the Treasury yesterday, the recruitment industry estimates the cost to be at least £400m.

Anne Fairweather, head of public policy at the Recruitment Employers Confederation, said: "We think the Treasury's figure grossly underestimates the cost. The Government needs to look at the areas where it is responsible, in social care, the supply of locum doctors, and ask whether it can afford to pay for the uplift itself?"

The confederation is co-ordinating industry efforts to convince the Treasury to think again. It is supported by the English Community Care Association, the Association of Colleges and the Charity Finance Directors Group, as well as the employer's body the CBI and the British Bankers' Association. "This will have a dramatic impact on the supply of staff to work with some of the most vulnerable in society," said Ms Fairweather.

Agencies normally charge VAT at 17.5pc on their services, including the wages of the individuals supplied, which their customers can claim back.

But those operating in the charity, healthcare and financial services sectors cannot as they are zero rated for VAT purposes. They had been exempted to ensure a level playing field in the supply of temporary staff.

The Treasury rejected the industry's concerns. A spokesman said: "This concession was always a temporary measure introduced to correct market failure. It has no legal basis."

By Richard Tyler, www.telegraph.co.uk