VAT Exemption for Locum Doctors – A Major Change Following Isle of Wight NHS Trust v HMRC

HMRC Brief 9 (2025) Confirms Policy Shift on VAT for Locum Doctors

On 15 December 2025, HMRC published Revenue and Customs Brief 9 (2025): VAT liability of the supply of temporary medical staff (locum doctors).

This follows the landmark tribunal decision in Isle of Wight NHS Trust v The Commissioners for HMRC [2025] UKFTT 1114 (TC), which challenges HMRC’s long-standing position that agency-supplied locum doctors are subject to standard-rated VAT.

For healthcare recruitment agencies, NHS bodies, GP practices and medical service providers, this represents one of the most significant VAT developments in the healthcare sector in recent years.

📜 The Legal Basis: Medical Services VAT Exemption

Under Item 5, Group 7, Schedule 9 VATA 1994, the supply of:

“a deputy for a person registered in the register of medical practitioners”

is exempt from VAT.

Historically, HMRC interpreted this exemption narrowly, limiting it largely to traditional GP deputising services such as out-of-hours cover.

The Tribunal rejected that narrow interpretation.

It confirmed that:

• A locum doctor can constitute a “deputy”
• The exemption is not confined to out-of-hours services
• The exemption can apply where doctors are supplied via agencies
• The substance of the supply determines VAT treatment

This decision broadens the application of the medical services VAT exemption and overturns HMRC’s previous practice.

HMRC has confirmed it will not appeal and is revising its guidance.

VAT on Locum Doctors – Staff Supply or Medical Care?

The core VAT issue concerns classification:

• Supply of staff → normally standard-rated
• Supply of exempt medical care by a registered practitioner → exempt

HMRC historically treated agency arrangements as taxable staff supplies.

The Tribunal instead examined:

• Whether the locum was acting as a deputy
• Whether the role required GMC registration
• Whether medical care was being provided
• The contractual and operational reality

This reinforces a key VAT principle: substance over form.

Simply labelling a contract as “staff supply” does not determine VAT liability.

Reclaiming Overdeclared VAT on Locum Doctor Supplies

Organisations that have charged 20% VAT on locum doctors in the past four years may be entitled to reclaim over declared output tax. We are seeing many customers requesting refunds of this incorrectly charged VAT and recommend that suppliers consider their position to avoid being significantly out of pocket.

However, this is not straightforward.

Four-Year Time Limit

Under VAT legislation, errors can normally only be corrected within four years of the end of the relevant VAT period.

Early action is critical.

Error Correction Notification (ECN) vs VAT Return Adjustment

If the net error exceeds HMRC’s reporting threshold, a formal Error Correction Notification (ECN) must be submitted.

Incorrect or poorly evidenced ECNs can result in:

• Penalties
• Enquiries
• Extended HMRC scrutiny

Unjust Enrichment Rules

HMRC will not repay overdeclared VAT if the supplier retains the benefit.

This means:

• VAT must be refunded to customers
• Evidence of repayment may be required
• Sequencing of claims matters

For healthcare recruitment agencies operating on tight margins, this presents commercial risk if not handled correctly.Unjust Enrichment Rules

HMRC will not repay overdeclared VAT if the supplier retains the benefit.

This means:

• VAT must be refunded to customers
• Evidence of repayment may be required
• Sequencing of claims matters

For healthcare recruitment agencies operating on tight margins, this presents commercial risk if not handled correctly.

Partial Exemption and Capital Goods Scheme Implications for Healthcare Providers

Reclassifying supplies from standard-rated to exempt will reduce taxable turnover.

This can impact:

• Partial exemption recovery rates
• Input tax entitlement
• Capital Goods Scheme calculations
• Historic input tax adjustments

In some cases, output tax recovery may be partially offset by reduced input tax recovery.

A full VAT impact assessment should be undertaken before submitting any claim.

What About GP Practices and NHS Bodies Who Paid VAT?

Healthcare providers charged VAT on locum doctor services cannot reclaim the VAT directly from HMRC.

They must seek reimbursement from the supplier.

For:

• Fully taxable NHS entities → may be cash flow neutral
• Exempt GP practices and partnerships → VAT may have been an absolute cost

Over four years, this could amount to a substantial recoverable sum.

However, time limits and supplier recovery constraints may restrict repayment.

Evidence Required to Support VAT Exemption Claims

Not all locum arrangements will qualify.

To fall within the VAT exemption for medical services:

• The individual must be a registered medical practitioner
• The role must constitute acting as a deputy
• The services supplied must be medical care
• Contracts and working practices must support the analysis

Locums engaged in non-clinical or advisory roles may not qualify.

Each arrangement requires technical review.

Future VAT Compliance for Healthcare Recruitment Agencies

Going forward, agencies should:

• Review VAT treatment of current locum supplies
• Amend contractual terms where appropriate
• Update invoicing systems
• Model partial exemption impacts
• Monitor HMRC manual updates

Continuing to charge VAT incorrectly could lead to further overdeclaration and financial exposure.

Wider Implications for Healthcare VAT

The principles established in Isle of Wight NHS Trust v HMRC may prompt review of:

• Dental locum supplies
• Consultant placements
• Specialist clinicians
• Multi-disciplinary clinical staffing models

However, careful analysis is required before applying the decision more broadly.

How Deeks VAT Consultancy Can Help

We advise both:

Healthcare Recruitment Agencies and Medical Service Providers

• VAT exemption eligibility reviews
• Contractual analysis
• Quantification of overdeclared VAT
• Error Correction Notification preparation
• HMRC technical representation
• Partial exemption modelling

GP Practices, NHS Bodies and Medical Partnerships

• Assessment of VAT incorrectly charged
• Supplier engagement strategy
• Financial modelling of recovery
• Historic claim analysis

If you have supplied or purchased locum doctor services in the past four years, now is the time to review your VAT position.

Please contact Jane Deeks for a free no obligation meeting to discuss how we can be of assistance.

📩 jane@deeksvat.co.uk
📞 07710 553831