NHS’s VAT dodge ‘could cost more than IR35 reforms save’

A tax scheme on the NHS that has sprung up since IR35 reform – and is unlawful wherever the reform is misapplied – may cost HMRC the £400million which the reform is set to save.

Making this prediction to ContractorUK, an ex-tax inspector said the NHS scheme could “outstrip” the amount of revenue that last year’s changes to IR35 are projected to safeguard.

Carolyn Walsh, now an accountant, also says the exchequer loss will come from both the scheme -- flagged up yesterday by the IHPA, plus any variants “waiting to trap unsuspecting contractors.”

'Direction, Control'

The scheme works by relying on an HMRC exemption which relates to the supply of services of medical care by registered practitioners, mostly registered doctors and nurses.

But the fundamental condition for the availability of the HMRC relief (or exemption) is that the contract for the practitioner is one where they are not under ‘Direction’ and ‘Control.’

Within the NHS however, the default position affecting “almost all” engagements is that the locum is on a contract deemed ‘inside IR35,’ meaning they are under direction and control.

“The schemes….hinge on accountants claiming to be providing ‘healthcare’ to trusts to exploit a VAT loophole,” adds the IHPA, referring to the ducking of the 20% VAT charge.

“[But these schemes] became illegal when senior civil servants started pushing NHS trusts to blanket-assess all public sector contractors en-masse as ‘deemed employees’.”


In a letter to 300 NHS trusts, which the IHPA is accusing of using the schemes and potentially with criminal conviction consequences under the CFA for trust directors, IHPA’s lawyer says:

“There is a growing, and now widespread, practice of VAT mitigation used by NHS providers, which our client considers is likely to be ineffective at least so far as it applies to locum workers who are assessed as having employment contracts and/or are inside IR35.”

A boss of an umbrella company reflected: “This is almost proof to HMRC that public sector workers should have been allowed to work through their own PSCs, rather than being forced en-masse to work via umbrella companies.”

However according to Andraste Accounting Ltd, where former tax officer Walsh is managing director, HMRC already knows about the schemes and warned of the consequences back in December 2016.

'Amend their operations'

Dr Iain Campbell, secretary-general of the IHPA, says NHS trusts and providers have now been written to, with the advice they “amend their operations” to avoid exposure under additional legislation.

Obtained by ContractorUK, the letter to the NHS trusts speaks of them potentially taking external advice “to ensure that the arrangements are not caught by DOTAS.”

Or, if not, they may need to run a “detailed enquiry pursuant to the Criminal Finance Act 2017" to -- in particular -- ensure that the NHS body is "satisfied that the are sufficiently insulated from any suggestion that they are knowingly concerned with prohibited tax arrangements.”


Dr Campbell says there are adverse consequences for individual workers too – in addition to the fact that, as ‘associated persons,’ they too could be brought to book under the CFA.

“NHS trusts and accountants have been exploiting a VAT loophole that has allowed private ‘umbrella’ companies to pocket up to 50% of VAT avoided whilst at the same time leaving thousands of temporary workers facing huge tax bill hikes.”

He added: “This double-whammy threatens to have disastrous implications for the NHS, not only in millions of pounds of tax that should have gone to the chancellor and then spent on a cash-strapped NHS, but also because many of the frontline workers affected will leave their roles with others facing hardship, bankruptcy and breakdown as a result.” 

The IHPA explained that due to classifying their workers as employees from ‘inside IR35’ determinations, trusts are then “unlawfully” passing on their employment tax obligations to the workers themselves.

So health “workers [are being] wrongly charged Employer’s National Insurance Contributions and even the Apprenticeship Levy,” alleges IHPA, resulting in an estimated 14% reduction to workers’ incomes.

“Whilst we are sympathetic to the trusts who are indeed desperately underfunded, it is rank hypocrisy for trusts to force our workforce into ‘false employment,’ without the obligatory assessments,” Dr Campbell said.

“[Trusts are] aiming to cause doctors and nurses to be taxed more, whilst contemporaneously engaging in arcane accountancy practices in an attempt to dodge their own tax liabilities arising directly from the same actions.”

'Irrational if HMRC doesn't investigate'

He added that blanket-assessing of IR35 status, followed by the unlawful use of the VAT agency hiring exemption -- known as Direct Engagement schemes -- was “bad enough.”

“But, to then force workers to shoulder the trusts’ employer’s liabilities beggars belief,” Dr Campbell said. “Many NHS bosses and accountants will not be resting easily…. we urge all affected to review their arrangements to ensure they are certain they are all behaving lawfully.”

The IHPA (Independent Health Professionals’ Association) has written to HMRC to outline the alleged tax abuses, saying it would be “irrational of HMRC not to open an investigation”.

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Written by Simon Moore

Simon writes impartial news and engaging features for the contractor industry, covering, IR35, the loan charge and general tax and legislation.
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