Understanding the VAT Concession for Nursing Agencies and Umbrella Companies
In the wake of IR35 reforms and the growing prevalence of umbrella companies among NHS workers, confusion surrounding nursing agencies’ VAT responsibilities has become more prevalent. This confusion primarily revolves around the application of a concession and determining who bears the VAT burden: the end client, the agency, or the umbrella company. However, it’s crucial for recruiters to understand that the nursing agencies’ VAT concession does not apply to fully compliant umbrella companies
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What is the concession, and where does it apply?
This concession dictates that, under specific circumstances, nursing agencies and employment businesses are exempt from VAT accountability when providing certain 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 primary goal is to reduce the cost of medical staff. However, HMRC stipulates that the concession should only benefit those directly supplying nurses, excluding umbrella companies deemed too distant in the supply chain to qualify.
What are the issues, and how should compliant umbrella companies respond?
In the absence of the concession, recruitment agencies typically charge VAT when supplying staff to an end-hirer. This VAT is then transmitted down the chain, and the umbrella company remits it to HMRC upon receiving funds from the agency.
Before the IR35 changes, nurses with their limited companies enjoyed VAT exemption due to low company turnover—a scenario not applicable to umbrella companies.
Compliant umbrella companies must levy VAT, even if the concession relieves the agency from charging VAT to the end client. In such cases, a responsible umbrella provider would decline collaboration unless the agency agrees to pay the VAT. Any umbrella company claiming VAT exemption is misinformed.
Despite the concession being informal and not officially classified as an exemption, recruiters face immediate risks if the umbrella company neglects to charge VAT. In most instances, the VAT responsibility falls back on the recruiter as the worker’s supplier.
If an umbrella company charges VAT and the agency opts for the concession, they might forfeit the right to reclaim the VAT charges. Errors in VAT liability can lead to substantial debts and potential penalties from HMRC.