New VAT challenge in the recruitment sector

What will be the effect for recruiters in the care sector of HMRC’s new position regarding the direct engagement of locums?

Recruitment companies providing temporary medical and health care staffing should take note of a recent HMRC challenge regarding the VAT status of a locum engagement model.

Many recruiters operating across the care sector have adopted, or work across, different models of engagement which are seen to provide VAT ‘savings’ for the host client.

Does a recent challenge by HMRC indicate an end to these models?

Many in the sector will be familiar with locum models and managed service offerings to the NHS and health sector.

Many recruiters may also be aware that HMRC have recently changed their mind on the VAT status of one of the largest providers in the market which may have significant commercial impact across the recruitment sector – both for recruiters and the host clients.

This important challenge demonstrates HMRC’s apparent change in policy and proposed changes by HM Treasury may spell the end for direct engagement models.

Firstly, what are the basic concepts?

  1. Supplies of staff are ordinarily subject to VAT. Subject to any HMRC concessions, this includes supplies of medical staff including nurses, allied health professionals and locums.
  2. HMRC’s nursing concession allows recruitment businesses to optionally exempt supplies of nursing staff, so long as certain conditions are met.
  3. When VAT is charged, the NHS is entitled to a refund of its non-business VAT costs for nursing staff only. Other healthcare providers, in general, cannot reclaim their VAT costs.
  4. Qualifying medical service contracts are exempt from VAT.
  5. The existing Conduct of Employment Agencies and Employment Businesses Regulations 2003 (the ‘Conduct Regs’) provide a legal framework for recruitment businesses to adhere to when placing work-seekers. Employment businesses must supply staff as a principal.
  6. Lastly, employees do not charge their employers VAT (salaries are outside the scope of VAT).

There has been plenty of VAT case-law in the recent past, but the above rules form the fundamental building blocks.

Secondly, what are the main models or routes-to-market that exist in the recruitment sector?

Main models or routes to market that exist in the recruitment sector

*PSC - personal services company, MSP - managed service provider

Standard model: As can been seen from above, the standard model results in a VAT charge to the host client.

Nursing concession: Application of the nursing concession can be applied to exempt from VAT the provision of nursing staff. This is usually applied when supplying staff to non-NHS hosts.

Direct engagement: Commonly utilised for non-nursing staff, a correctly structured direct engagement model re¬quires the host to employ the worker directly. This can help mitigate VAT costs for the host client, though arguably, might not be in the spirit of the Conduct Regs.

Medical services: Lastly, the VAT exempt medical services model relies on the medical services ‘contractor’ being responsible for the delivery of medical services; as opposed to host client buying in locums to facilitate their provision of medical services.

What is HMRC’s current position on locums?

Direction and control tests will be influential for any medical services model. Whilst it is not uncommon that locums will strongly argue that they operate under their own direction, ultimately, the tests can be wider than an individual’s, or a collective of individuals’ day-to-day independence. For example, who tells them where to work and who to diagnose? 

HMRC has now formed an updated view on the medical services model. We understand HMRC regard the medical services company is, in reality, providing medical locums as opposed to medical services. HMRC has insisted VAT must now be charged. This is a bold move by HMRC and may result in a new round of litigation. 

For other operators using this model, plus for any recruitment businesses or individual locum who maintain they are providing medical services to their host client, the principles are exactly the same. They, too, may now be at risk of HMRC assessment. 

Are direct engagement models at risk and who does the risk sit with? 

We understand that HMRC is not currently challenging direct engagement models where the worker is employed by the host, including short-term worker contracts.

So, why don’t all recruitment businesses just act as an agent allowing the host to engage staff directly? The simple answer is because of the Conduct Regs.

The Conduct Regs require an employment business to engage the worker. The salary element is then recharged by the employment business as a principal supply of staff to the host. 

However, there may be a number of models in operation that are not wholly compliant with the Conduct Regs, and this could put them at risk of challenge on different technical grounds to the medical services model. Subject to contractual terms agreed, the risk will usually rest with the managed service provider. 

The key message is HMRC may now feel emboldened to revisit the market and upturn stones. It would seem prudent for all recruitment firms to review their own arrangements, to ensure they are compliant and are not at risk of a costly HMRC assessment. 

Are major changes to the NHS VAT rules afoot?

Interlinked with the above, HM Treasury are currently consulting on a major change to the NHS and government department VAT refund scheme. Our expectation is that the VAT regime will be amended to a full VAT refund scheme, probably by April 2020. 

One of their main concerns is the prevalence of VAT driven staffing models and other VAT schemes. If the NHS and government departments no longer suffer VAT as a cost, then the VAT ‘savings’ of direct engagement will disappear. 

On the up-side, this should help deliver a more level playing field across the recruitment sector and reduce the need and risk for those operating via direct engagement models. 

However, this change is likely to have a large effect on the commercial landscape. Combined with all the other recent tax changes imposed by HMRC, the recruitment sector remains a battlefield of rules and regulation.

What action should recruitment companies and locums take? 

Recruitment companies and locums should review their VAT treatment in light of the above changes: 

  • Do you understand what staffing model(s) you currently operate?
    • Review and categorise your agreements. 
  • Is your approach VAT efficient for the end host?
    • Appraise your routes-to-market – could you be more VAT efficient? 
  • Are you in the high-risk medical services contract area?
    • If so, seek technical assurance and review your contractual terms. 
  • Are you in the process of negotiating direct engagement models?
    • If the VAT rules are changing, what protective clauses should you consider? 
  • With increased HMRC focus, are you VAT compliant?
    • Don’t give HMRC cause to undertake in-depth audits – make sure you have been applying VAT correctly. Where corporate groups are involved, have you understood their effect on the models listed? 
  • Are you relying on legacy HMRC opinions or prior officer visits?
    • Reliance on an outdated opinions or lack of prior HMRC comment is rarely a good defence – get some updated advice. 

How can RSM help? 

As HMRC is now reviewing VAT in within the recruitment sector, it is important to manage your risk and make sure your own house is in order. 

Our VAT specialists and recruitment sector experts have detailed knowledge and can provide support and advice on all aspects of how this change could impact your business. Please contact Scott Harwood.