Tax court rules no VAT chargeable on locum doctors
In an unexpected twist, HMRC have published a new business brief (Revenue and Customs brief 9 (2025)) inviting VAT rebate claims from the NHS and healthcare providers for the provision of locum doctors.
This follows a recent First-tier Tax (FTT) tribunal decision involving the Isle of Wight NHS Trust where it was determined deputising doctors, usually provided by recruitment companies to healthcare providers, is VAT exempt under UK legislation.
HMRC has now accepted the decision and has chosen not to appeal the FTT decision. Hospitals and medical care providers can ask their suppliers to lodge backdated rebate claims with HMRC to recover irrecoverable VAT previously charged to them. Initial estimates indicate these claims could be in the billions.
Previously, HMRC had consistently maintained the provision of doctors to healthcare providers was subject to VAT. This is on the basis such charges are for supplies of staff as opposed to medical services, thus cannot fall within the medical services VAT exemption.
However, since the late 1970s, there has been a separate ‘item 5’ included within UK legislation which exempts “the provision of a deputy for a person registered in the register of medical practitioners”. The origin and purpose of this item had always been somewhat mysterious. While a trader, Rapid Sequence Ltd, previously took a case in 2013 regarding this item but presented no origin information, the court read this item to conform with the EU Principle VAT Directive (PVD) and so limited its use to medical services.
The new group legal action, led by the Isle of Wight NHS Trust, produced further evidence on the origins of this item. Explanatory notes from this period made it clear the exemption was an extension to medical services and so the law specifically covered deputising doctors, ie locum services.
Despite the legislation being in conflict to the PVD, taxpayers have a right to rely on UK legislation where it is clear on its intent. On this basis, the court ruled item 5 exempts supplies of temporary doctors to the medical sector.
With billions at stake for the NHS, private hospitals and medical care providers, this case opens up a huge opportunity to request that their suppliers (recruitment agencies) submit VAT rebate claims on their behalf.
At this stage, HMRC have not outlined a clear policy but they have indicated recruitment businesses must restrict their input tax recovery associated with making exempt supplies of locum doctors. This will have a significant commercial impact and taking professional advice is strongly recommended.