Tax court rules no VAT chargeable on locum doctors
In an unexpected twist, a recent First-tier Tax (FTT) tribunal decision involving the Isle of Wight NHS Trust determined deputising doctors, usually provided by recruitment companies, to healthcare providers is VAT exempt.
If HMRC accepts, or fails to successfully 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.
HMRC has consistently maintained the provision of doctors to healthcare providers is 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 has 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.
A 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. In our view, HMRC is likely to change the law prospectively and appeal this decision on the historic position, meaning the issue may yet remain in limbo for a number of years.