VAT in the health and welfare sectors

Employment businesses providing staff to clients in the health and welfare sectors will be well aware of the complexity of VAT law in this area. The complexity is being tested further as many businesses come under increased pressure from clients to apply VAT exemption to their supplies.  The pressure from clients in these sectors arises as they are hit hard by budget cuts and, in addition, can often only recover only a small percentage of the VAT charged to them.  

This article provides some practical tips on how to navigate the VAT issues in this area whilst avoiding potentially expensive VAT accounting mistakes. 

Determining whether an employment business makes a supply of health/welfare services or a supply of staff is the first matter to be addressed in determining the correct VAT treatment of its activities.

Under UK VAT legislation, where the client is responsible for the day-to-day control and supervision of a worker provided by an employment business, a supply of staff and not a supply of healthcare/welfare services is being made. In many cases VAT must be charged on the supply, as supplies of staff (healthcare workers or otherwise) are treated as taxable (although some limited exceptions to this are discussed below). 

In contrast, where an employment business provides a managed service, which is common for example in the domiciliary care market, these services may qualify for VAT exemption as a health or welfare service.

VAT liability of supplies of staff

In many cases employment businesses contract to provide a range of workers to their clients – from specialist doctors to healthcare assistants.  As mentioned above, the supply by a business of the majority of healthcare workers (where the individual is directed in his/her work by the client) will be subject to VAT at the standard rate - currently 20%.  However, there are some exceptions whereby HMRC will allow employment businesses to exempt supplies of certain nursing staff if specific conditions are met. The concession allowing VAT exemption of nursing staff and the conditions attached to it are as follows:

The Nursing Agencies’ Concession

By way of an extra-statutory concession, employment businesses providing nurses may (but are not obliged to) exempt the following supplies of staff:

• registered nurses
• unregistered nurses who are directly supervised by a registered nurse; and
• unregistered nursing auxiliaries whose services are supplied to a hospital, hospice or care home providing nursing, where those services form part of the care made to the patient

The conditions for meeting the test of “direct supervision” are numerous.  It is important for suppliers to satisfy themselves that the conditions are met – which will involve having a regular dialogue with customers to understand the roles into which unregistered nurses are placed and the structures that operate on the “client-side” for controlling and supervising those workers.  As a result, employment businesses may wish to consider introducing regular reviews or audits to ensure that clients are meeting the conditions required to support exemption.  

It is accepted that unregistered nursing auxiliaries should undertake some direct form of medical care for their provision to qualify for VAT exemption.  HMRC provide examples of medical care as including the administration of drugs or the taking of blood pressure.  It is unclear from the guidance how much time the individuals must spend on this activity but without any involvement in such activities the services will be liable to VAT.  Again, determining exactly what workers do when under the control and supervision of clients can be difficult and can create a risk from the perspective of the employment business.  Establishing a specific and regular dialogue with customers is important to accurately establish the precise duties of the temporary workers when on placement.  The level of training required for the temporary workers may also be relevant and it should be consistent with the VAT treatment being applied to the provision of those staff.    

Remaining competitive and getting it right 

Employment businesses are currently facing the challenge of adding value in a market where clients are coming under increasing pressure to reduce costs. Despite this, it is important to protect the business from a potential exposure to unpaid or under declared VAT; it is the employment business as supplier that HMRC will hold liable to account for any VAT in the event that its supplies should have been treated as liable to VAT rather than exempt.  Businesses can be assessed by HMRC for up to four years’ of previously unpaid VAT and may also be assessed for interest and penalties.  

Before agreeing to exempt supplies of temporary healthcare workers, employment businesses may wish to consider seeking an indemnity from their clients that (should HMRC determine that a supply is liable to VAT rather than exempt) it will reimburse the business for any and all VAT held to be due in addition to any interest and penalties. It is also recommended that employment businesses deal on terms which are exclusive of VAT.  This should allow the business to seek to recover any undercharged VAT from its clients in addition to the net price that has been agreed rather than having to fund the VAT out of the gross amount agreed.

Finally, employment businesses should be aware that it is not possible to recover VAT on costs relating to exempt activity.  Therefore, applying VAT exemption may lead to an increase in operating costs which should be taken into account when agreeing prices with customers.

Although businesses will be keen to price competitively and to apply VAT exemption where customers are unable to recover VAT, it is recommended that they proceed with caution to avoid falling foul of some of the difficult rules in this area.