Two employment businesses that provide temporary nursing staff to hospitals have been dealt a huge financial blow by failing to keep up with the changing shape of HMRC concessions. 1st Alternative Medical Staffing and Delta have lost High Court judicial review proceedings brought against HMRC regarding the VAT position of their services.
Under the terms of HMRC’s Staff Hire Concession, withdrawn in 2009, employment businesses were permitted to charge VAT on their commission only, with the pass-through salary not subject to VAT. Under the alternative Nursing Agency Concession, which is still in force today, a business providing nursing staff can, subject to conditions, choose to treat their whole supply as VAT exempt. Both these concessions have been a valuable relief for hospitals and care home customers who cannot usually reclaim any of VAT charged to them by employment businesses.
For a long time, 1st Alternative and Delta had used the Staff Hire Concession and relied on a letter from HMRC to Delta in 2004, which confirmed it was acting as an agent, so only accounted for VAT on commission. However, in 2017, HMRC decided to assess 1st Alternative and Delta for VAT totalling £2m on the basis that they must account for VAT on the full value of their supply, including salaries.
The businesses claimed they were unaware of HMRC’s withdrawal of the Staff Hire Concession and argued that HMRC’s letter from 2004 had led them to believe their VAT treatment was correct. They argued HMRC should allow them to apply the Nursing Agency Concession to their historic supplies, especially given the small taxation difference between the two concessions.
The businesses claimed that many of their competitors adopt a similar VAT treatment to them, and they were also aware of one case where HMRC had allowed retrospective use of the Nursing Agency Concession.
Despite this, the court found that it is implicit in the purpose and function of the Nursing Agency Concession, and most other extra statutory concessions, that a trader has a choice whether to rely on it. In the court’s view, this also means that HMRC cannot be compelled to apply the concession whenever the conditions are met without election by the trader. As the trader hadn’t elected to use the Nursing Agency Concession at the time, it could not elect to use it retrospectively.
The conclusion that the companies could not rely on HMRC’s letter from 2004 is not surprising, as they apparently made no effort to keep their VAT position updated in response to subsequent well-advertised changes in HMRC’s policy. The court’s findings on the Nursing Agency Concession reaffirms past case law that concessions cannot generally be applied retrospectively.
The High Court’s decision is concerning for businesses who use extra statutory concessions on tax matters. There is currently no formal requirement for a business using the Nursing Agency Concession to notify HMRC, and this is also the case for most other extra statutory concessions. If a dispute arises, this makes it difficult to determine whether a concession was adopted retrospectively.
While HMRC can’t be expected to consider every possible concession that may have retrospectively applied, its refusal to accept the application of a well-known and widely used concession as an alternative seems harsh, especially as the employment businesses had met the conditions of use during the period in question.
RSM has identified at least 25 staffing VAT concessions and reliefs. These are listed across a wide range of public notices, making it a bewildering prospect for employment businesses to stay abreast of latest rules. It seems very unfortunate for 1st Alternative Medical Staffing that it has accrued a large VAT liability, simply by choosing the wrong concession.