In December 2025 a landmark ruling by a Tax Tribunal clarified the VAT status of the supply of temporary medical practitioners. Subsequent guidance by HMRC in the same month has opened the way for employment businesses to reclaim VAT standard rate tax as the supply was reclassified as exempt. But is this a permanent state of affairs or are there possible future downsides for agencies in the health sector who have umbrella companies in their supply chain? We take a closer look at the background and flag some potential issues which may counsel a more measured alternative to a rush to put in a VAT repayment claim.
Some background
For many years since IR35 began to bite and the use of a personal service company by nurses and doctors seeking temporary positions fell away, the health sector has been fighting HMRC over the issue of VAT exemption for the supply of medical professionals.
In 2014 HMRC published an important brief ‘Health professionals and pharmaceutical products (VAT Notice 701/57)’, outlining their view on how to account for VAT on goods and services provided by registered health professionals including doctors, dentists, nurses and pharmacists.
The Notice contained guidance on their views as to which supplies of services qualified for VAT exemption – a vital factor for NHS organisations who were themselves exempt from VAT and therefore unable to reclaim any standard rate VAT charges.
Challenges to HMRC’s position
During the intervening 10 years, several appeals to the Tax Tribunal and higher courts were made asserting that the supply of nurses, care workers, consultants and GP specialists by agencies and umbrella companies should be exempt from VAT.
The appeals were largely dismissed with the courts finding that what was being provided by an agency or intermediary was not exempt medical care but a standard -rated supply of staff.
They concluded that the tests for VAT exemption outlined in the VAT Act 1994 and HMRC’s interpretation of them had not been met, often because the supplier had no medical expertise and did not exercise control over clinical decision-making with that being left with the end-client – the NHS Trust.
A landmark case
However, a First Tier Tribunal (FTT) case in December 2025 – Isle of Wight NHS Trust v HMRC [2025] UKFTT 1114 (TC), which the latter lost, has thrown a different complexion on things. Normally, FTT cases are not normally considered to be binding or providing conclusive directions for future, similar cases. If HMRC lose a case which has significant tax implications for a wider body of taxpayers, they will consider appealing to a higher court.
The Isle of Wight NHS case was a specially selected appeal from a number of appeals lodged by a group of NHS Trusts. Those Trusts were supplied with locum medical staff (registered doctors) from third party agencies and the Tribunal found that that supply qualified for VAT exemption. The Tribunal dismissed HMRC’s narrow view of the exemption applying only to certain deputising services and not specifically to a supply of staff which would otherwise be taxable at the standard rate.
HMRC’s reaction
This judgement gave HMRC pause for thought. They reviewed the judgement and decided not to appeal. In December 2025 they published Revenue and Customs brief 9 titled VAT liability of the supply of temporary medical staff (locum doctors).
The brief effectively changed HMRC’s long-held view as to the taxable nature of the supply of locum doctors and other deputies who are GMC -registered medical practitioners. It has invited affected parties to reconsider the VAT treatment of such supplies to NHS Trusts going forward as well as over the past four years.
There has subsequently been an interest from agencies and umbrella companies in looking at how and what action they may need to take to check their VAT returns and whether they can claim a refund of overdeclared output tax.
The need for a measured view and considered course of action
With most issues around tax treatment changes, there are a few cautions to flag before jumping in, particularly from the perspective of an umbrella company involved in this sort of supply chain.
The first thing to point out is that, as well as issuing Revenue and Customs brief 9, HMRC said that they would also be issuing ‘further guidance’. Prima facie then we have what might appear to be a definitive statement in the brief but an inherent caveat that this might not be the end of the matter.
Further guidance may be of a technical nature and not affect the main body of the changes, but it could identify situations in which the VAT exempt treatment may be restricted or unavailable.
An umbrella company in the supply chain
The Isle of Wight NHS case did not involve an umbrella company and the HMRC brief mentions the VAT reclaims available to ‘employment businesses’. We know that the definition of an umbrella company is still undecided.
If it is eventually classified as an employment business, then the brief would apply. However, the further guidance promised by HMRC may pre-empt this by confirming or proscribing claims where an umbrella company is involved. We just don’t know yet.
Are your contractual arrangements with the NHS the same as those involved in the Isle of Wight NHS case?
The complexity of VAT law and contract law are closely intertwined in cases heard before Tax Tribunals. Both the written and actual working arrangements are always minutely examined and tested by the courts. Unfortunately, the record of lost appeals is littered with cases where assumptions of similarity and allegedly identical facts prove under close scrutiny, not to be so.
The spectre of Joint and Several Liability (JSL)
The labour supply industry is gearing itself up for a new way of working with umbrella companies from 6 April 2026. Agencies will be focussing on reputable, financially sound and compliant providers.
Making prudent, even cautious decisions on tax in collaboration with umbrella partners is an essential part of due diligence. Unfortunately, even that cannot mitigate the impact of JSL in worst case scenarios so it’s vitally important to get tax decisions right first time.
Conclusion
This latest development in VAT treatment in the health sector was a surprise to many tax commentators and even more so that HMRC chose not to pursue its loss to a higher court. What happened was a complete overturn of HMRC’s position on the supplies of locum doctors.
Where agencies are making supplies direct to NHS clients it appears that proceeding in line with brief 9 is safe but where those supplies are being made via an umbrella company, we would counsel a “wait and see” approach.
It may be prudent to await the further guidance promised by HMRC and/or responses to requests for clarification from trade representatives and others in the industry.
If you would like any further information or advice on this topic, please contact your Key Account Manager.
