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Tax rule change means £500m bill for NHS

7 April 2014

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Substantially increased costs could be on the horizon following changes to VAT recovery rules. 

The NHS’ tax bill could increase by at least £500 million from 1 April when rules on reclaiming VAT are standardised carps all government departments. 

The changes will mean new recovery rules for services that are contracted out – including administrative agency staff, estates management and consultancy. 

HM Revenue and Customs (HMRC) said the new guidance had not introduced changes, but that the rules had previously been “misunderstood”. 

An HMRC letter sent to NHS organisations in February regarding VAT recovery on agency staff reads: “We are aware that as a result of the term ‘agency staff’ being included within the heading many NHS bodies have recovered VAT incorrectly on supplies of agency staff, rather than under a contract for the provision of services.

“Where agency staff have been utilised because of difficulties in recruiting staff to fill permanent posts or are brought in to supplement existing staff levels during busy periods, then the criterion of being a contracted out service would not be satisfied and consequently any VAT incurred would not be recoverable. Hiring staff to continue an in-house activity is the opposite of contracting out that activity.”

This does not apply to agency nursing staff, where VAT can still be recovered.

An Ernst & Young analysis found that this could cost the NHS over £500 million.