Since the IR35 reforms and the subsequent increase in the use of umbrella companies by NHS workers, there has also been a rise in confusion over nursing agencies’ VAT liabilities, especially among the recruiters themselves. This largely surrounds the use of a concession and who is liable to pay the VAT: the end client, agency or the umbrella company. However, the main thing to note for recruiters is that the nursing agencies’ VAT concession is not applicable for fully compliant umbrella companies like SmartWork.
What is it, and where does it apply?
The concession administers that, under particular circumstances, nursing agencies and employment businesses are not accountable for VAT when supplying the following types of healthcare workers:
- Registered nurses
- Unregistered nurses directly supervised by a registered nurse
- Unregistered nursing auxiliaries whose services are supplied to a hospital, hospice or care home
The overall intention is to reduce the cost of medical staff. However, the HMRC feels that the concession should only apply to those who directly supply those nurses, therefore ruling out umbrella companies that are effectively seen as too far down the supply chain to gain from it.
What are the issues, and what should compliant umbrella companies be doing?
Ordinarily, without the concession, recruitment agencies must charge VAT when they supply staff to an end-hirer. This is then passed down the chain, and the umbrella company will pay the VAT to HMRC once it’s received funds from the agency.
Before the IR35 changes, many nurses using their own limited company were VAT exempt due to low company turnover, which is not the case for umbrella companies.
Umbrella companies must charge VAT, even if the concession means the agency does not need to charge VAT to their end client. In this instance, a compliant umbrella provider would not partake in a working relationship with the agency unless they were willing to pay the VAT. Any umbrella company that is claiming exemption from VAT is misinformed.
Although the concession is informal and not classed as an official exemption, the recruiter is immediately at risk if the umbrella company is not charging VAT. In most cases, the VAT will fall back into their hands, as the organisation is the supplier of the worker.
It is likely that if an umbrella company charges VAT and an agency chooses to use the concession, it may have no right to recover the VAT charges due. Any VAT liability errors can result in more substantial debts and potentially further penalties by HMRC.