Is the taxation system affecting the NHS landscape?

03 May 2017

It is often quoted that the NHS is the fifth largest employer in the world with a total workforce nearing two million people.

Whilst the number of people directly employed by the NHS has remained remarkably constant over the last 15 years, comparatively, we have seen a sizeable increase in the number of temporary workers. Contributing factors include meeting the capacity needs of an increasing and ageing population, the widening of the service scope offered by the NHS and the greater flexibilities demanded by both service provision and by the workers.

To counter the negative public perception of those ‘expensive’ recruitment agencies, there has been a real drive to reduce total agency spend through the mandated, and much publicised, NHS agency cap. The actual effect of this instrument is still too early to measure but it is certain to impact the size of the temporary workforce and how the NHS decides to engage staff. Coupled with this, are there other less noticeable policy instruments which are also being deployed by the government?

Taxation can be a complex area, and a tool the government can deploy with less public scrutiny or even under the banner of protecting against tax avoidance. We have examined below some key recent changes and how they could also be materially affect staff engagement.

Changes to legislation

Effective from April 2017, the introduction of the new off-payroll reporting rules, aimed only at the public sector, will require many workers engaged via a personal service company or some other intermediary to be paid through payroll. A qualifying worker’s tax must be withheld at source and the cost to the NHS will also increase. The overall aim must be to drastically reduce the number of people working through ‘tax efficient’ companies. However, as the new rules only apply to public bodies, many displeased workers may instead be driven to work for private care providers or move away from the sector entirely (eg IT professionals). Perversely, a reduced workforce pool will inevitably, despite the cap, further push up costs for the NHS.

Also with effect from April 2017, new VAT rules for the workers utilising the popular Flat Rate Scheme will force their adoption of a new increased rate. This applies to all users with limited costs and will potentially act as yet another tax disincentive for those working through their own company.

Lastly, the wider effect of the UK’s employment conduct regulations has ultimately resulted in Adecco’s high profile appeal failing at the Upper Tax Tribunal this month. In simple terms, by law, recruitment agencies are restricted in acting in an agency capacity. As a result, VAT is chargeable by on the worker’s remuneration as well as the agency’s own margin. This results in a substantial irrecoverable VAT cost for the sector with seemingly no reprieve in sight.

Download the full report for tax and VAT information on HMRC targeting and contrarily the lack of HMRC targeting.

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