Employment agencies supplying doctors may no longer be able to benefit from VAT exemption, says expert

VAT expert Steven Porter of Pinsent Masons, the law firm behind Out-Law.com, said that agencies and staffing companies reliant on the exemption should check contract terms carefully, even though the decision would likely be appealed.

"It is possible that HMRC [HM Revenue and Customs] will now begin looking for employment agencies or staffing companies that have sought to take the benefit of the exemption and make them register for VAT, account for VAT on their supplies and even potentially pay penalties," he said.

"It would therefore be advisable for anyone who has used the exemption to contact their VAT advisor, examine their business and contractual terms and look to protect themselves should HMRC come knocking on their door," he said.

The decision by the Tax Tribunal (17-page / 154KB PDF) was the first to consider the scope of the exemption contained in the VAT Act for "the provision of a deputy for a person registered in the register of medical practitioners or the register of medical practitioners with limited registration". The exemption is listed at Item 5, Group 7 of Schedule 9.

The taxpayer in the case, Rapid Sequence Limited, is a company that provides the services of overseas-based anaesthetists to NHS hospitals as 'locums' in exchange for a fee based on the number of hours worked. The anaesthetists are self-employed, and are paid a separately-agreed hourly rate by Rapid Sequence. HMRC said that as Rapid Sequence was supplying staff to NHS bodies, rather than supplying medical care, the Item 5 exemption could not apply. It said that the company should therefore account for VAT at the standard rate, as would be the case for any other supply of employment agency services.

In reaching its decision, the Tax Tribunal said that the Item 5 exemption had to be interpreted in a way that was consistent with EU law, providing that it was possible to do so without a "departure from a fundamental feature of the legislation". It said that it would have had "no hesitation in determining the appeal in favour of Rapid Sequence" if the provision was purely domestic legislation, as it had "no other interpretation when construed in isolation".

However, it was clear that Rapid Sequence did not itself provide medical care, the Tribunal said. These services were provided by "the medical professional concerned, not by the person who made the arrangements for those services to be provided by a locum", it said. Rapid Sequence's role was "no more and no less than one would expect of a business providing temporary staff and [did] not indicate any measure of control by Rapid Sequence over how the doctors provided perform their services", it said.

"The inevitable consequence is that the exemption provided in Item 5, if construed in accordance with its plain words, goes beyond the scope of the exemption permitted [in the European legislation]," the tribunal said.

Although it would have to "read words" into the UK legislation in order to have it conform to European law, the Tribunal said that there was nothing preventing it from doing so as there was "[no] indication that Parliament specifically intended to depart from" the European legislation.

"The words read in by the Tribunal have, in effect, completely removed Item 5 from our legislation," said VAT expert Steven Porter of Pinsent Masons. "What the tribunal did was amend the Item 5 exemption so much it became virtually identical to the, completely separate, main medical exemption."

"Given the importance of this decision to Rapid Sequence it wouldn't be surprising if they appealed the decision to the Upper Tribunal," he said.