Supply of medical locums: recent challenge may overturn VAT exemption

01 March 2023

The existing VAT legislation on the supply of medical locums has relied on an exemption first introduced in 1979. But a recent challenge by the NHS, may overturn this, resulting in VAT claims from the NHS and other healthcare providers. If the case is successful, this poses a significant risk for recruitment businesses supplying locums, who may incur significant costs in issuing and processing VAT rebates to their NHS and healthcare provider clients. VAT expert, Scott Harwood, analyses the case, along with recommendations for recruitment businesses to prepare for a potential change in legislation. 


Within the UK’s VAT legislation there is an unexpected exemption (item five; of group seven schedule nine VAT Act 1994) for the ‘provision of a deputy for a person registered in the register of medical practitioners.’ Introduced in 1979, to extend the medical services exemption for a deputising service to doctors, it remained a largely unused anomaly. It is important to highlight there is no similar exemption under the EU Principal VAT Directive (PVD) which previously dictated how the UK structured its own legislation and exemption reliefs.

Not until 2012 / 2013 did a recruitment business, Rapid Sequence Ltd, seek to rely on the item five relief when challenged by HMRC on their supply of locums to the NHS. The dispute was heard at the First Tier Tax Tribunal but ultimately failed with the judge, taking a conforming approach to UK legislation and effectively inserting words into item five to force it to comply with the PVD. Rapid Sequence did not appeal the decision and there it stayed.

On reflection, it was a somewhat surprising and arguably an unsatisfactory result as traders can usually rely on the plain reading of UK law. Since the case, HMRC have never updated the law but maintained the item five relief is essentially the same as item one relief which covers medical services, i.e., the relief added in 1979 was always superfluous. 

Roll forward a decade and the NHS (‘Isle of Wight and others versus HMRC’) have decided to re-challenge HMRC on the same technical point. Their first hurdle was HMRC denying the NHS, as the customer, the right to make a claim directly. (It is usually the supplier’s responsibility.) However, it was determined in the court decision that the NHS have a sufficient financial interest in the matter. If the relief is applicable, there would be a huge financial saving for the NHS. The next step will be another hearing to assess the technical merits of the argument.

With facts so similar to Rapid Sequence, one would think the pending court’s decision may remain unchanged. However, since we have exited the European Union, currently, the UK is still to an extent, constrained by the PVD. However, recent UK court decisions have noticeably taken a narrower line when conforming UK legislation against the PVD.

Why is this relevant for recruitment businesses?

Every year the NHS loses millions in irrecoverable VAT costs by sourcing locums from employment businesses. Whilst many NHS bodies use a direct engagement model to mitigate the impact, the traditional hiring route is still widely used.  

Sensing a significant opportunity, numerous NHS bodies are now submitting claims to HMRC. If the NHS do succeed, it is expected recruitment businesses will be forced to exempt their supplies of locums and rebate VAT to their NHS customers. This could have a significant financial impact for employment businesses who would become partially exempt and lose their own right to reclaim their associated VAT costs. The administration involved in rebating VAT to their NHS customers could also be significant.

Our recommendations

There is a realistic chance of the claims succeeding, therefore, if you are a recruitment business supplying locums to any healthcare provider, you should consider the impact to your business by:

  • Reviewing your historic VAT position;
  • Reviewing the commercial impact should you be required to facilitate claims for your clients; and 
  • Checking if your terms and conditions are fit for purpose to protect against unforeseen loss.

Our specialists work across both the healthcare and recruitment sectors and have been advising customers and suppliers on the issues and opportunities this case raises. Our VAT, tax and legal experts can support your business to work through the commercial impact, identify risk areas and agree relevant actions. 

Please contact Scott Harwood if you would like to discuss the impact for your recruitment business.