Provision of Staff – The VAT Pitfalls

The primary care sector is seeing an increase in restructuring activity which includes mergers and more collaborative working. This often means that staff employed by one entity may do work for another entity with a charge being made.

Supply of staff or supply of services that the staff are providing

A supply of staff would be made between two GP practices if the use of an individual who is employed by Practice A is provided to Practice B for a consideration [an agreement to provide a service in exchange for payment]. This applies whether the terms of the individual’s employment are set out in a formal contract or letter of appointment, or are on a less formal basis.

The determining factor is that the staff are not contractually employed by Practice B but come under its direction. Where staff are supplied to Practice B but continue to operate under the direction of Practice A, this is not a supply of staff, but is a supply of those services.  The supply of medical services is generally exempt from VAT, whilst the supply of staff is fully VATable.  The difference between the two may not always be straightforward.

Therefore, the charge from Practice A to Practice B above for a supply of an employee on secondment would be subject to UK VAT at the standard rate (currently 20%).

Joint employment of staff

In case of Practice A and Practice B entering into a joint employment contract with an employee there is no supply of staff for VAT purposes between the Practices.

In order for staff members to be considered to be jointly employed their contracts of employment or letters of appointment must make it clear that they have more than one employer. The contract must specify who the employers are (e.g. ‘Practice A and Practice B must both be named as joint employers).

When one practice acts as paymaster and pays the staff members salary, NIC and pension contributions etc, the reimbursement of its share of those costs by the other practice is treated as a disbursement for VAT purposes and is not subject to VAT.

Employees would not be considered to be jointly employed if their contract was with either Practice A or Practice B, even if their contract specifies that they will be required to carry out duties for the other practice. In that case there would be a supply of staff between one practice and the other and the treatment mentioned above would apply.

In many cases this might not be an issue.  Most medical practices are not VAT registered and the level of cross-charging of staff will be below the registration threshold of £85,000.  There may, however, be dispensing practices that are registered for VAT that would need to incorporate such cross-charging into their partial exemption calculations.  Such cross-charging may become more prevalent as GP practice and other provider organisations work collaboratively together.  Federations, for example, may provide VATable advisory services in addition to staff to practices for clinical purposes.  The supply of VATable services may therefore be of more than one kind.  Care is needed when in these more diverse times, so it is essential that advice is sought.

For the purposes of this article the possible NHS pension scheme implications have not been considered, only the VAT issues.

If you would like to discuss this further with a member of the VAT team, please contact Jonathan Main on 01772 821021.