The NHS faces a major crisis after it emerged that Trusts across the country are being implicated in an unlawful tax dodge which has compounded the detrimental impact of the public sector Off-Payroll reforms on locums.
An investigation by the Independent Health Professionals Association (IHPA) has found that hundreds of NHS Trusts have exploited a VAT loophole enabling umbrella companies to pocket as much as 50% of VAT avoided by the NHS.
- Locum workers bear brunt as NHS Trusts engage in VAT tax dodge
- Off-Payroll rules have driven engagement with the tax avoidance scheme
- NHS avoids millions in tax as locums lose 30% of their income
- HMRC continues to deny clear evidence of widespread non-compliance.
Meanwhile, locum nurses and doctors around the UK are being forced to engage via the same umbrella companies as the NHS continues to flaunt the compliance requirements imposed by the Off-Payroll rules. Many locums have subsequently been subject to an effective 30% drop in pay due to excessive and unlawful taxation.
Locums suffer as Off-Payroll rules encourage tax avoidance in NHS
The revelation belies claims made by HMRC, which in a recent consultation denied that non-compliance with the Off-Payroll rules was an issue, insisting that the vast majority of public authorities assessed status on a case-by-case basis.
“We have seen widespread evidence of blanket assessments whereby entire contingent workforces are forced into false employment and made to pick up the hirers tax bills” says ContractorCalculator CEO Dave Chaplin.
“For HMRC to claim that it hasn’t seen much evidence of non-compliance among public authorities is fanciful. In the NHS, near on 100% of assessments made are blanket decisions. But for HMRC to issue this denial, while failing to prevent other unlawful activity which actively incentivises non-compliance, is quite frankly astounding.”
HMRC’s claim was also made in spite of the fact that the taxman is currently investigating roughly 60 of the 550 umbrella company schemes engaged by NHS Trusts and locums for operating outside tax rules, as reported by The Times only last month.
How does the Direct Engagement scheme work?
The Direct Engagement model relies on accountants who claim to provide ‘healthcare’ to Trusts. The NHS will source locums through an intermediary and make two individual payments; a direct payment to the locum, and a separate commission payment to the intermediary. This is opposed to paying the intermediary a lump sum.
The arrangement significantly reduces VAT charges for NHS Trusts, who in turn pass on a portion of the savings to the intermediary. IHPA claims the schemes effectively became illegal when HMRC began encouraging NHS Trusts to blanket assess their locum workers as ‘deemed employees’, regardless of their working arrangement.
However, the dual incentive of negating Off-Payroll tax risk while making VAT savings has instead seen use of these schemes proliferate throughout the public sector since April 2017, resulting in widespread non-compliance with the Off-Payroll rules. Efforts by the NHS to save costs at the expense of its locums have been condemned by secretary general of the IHPA, Dr Iain Campbell:
“It is rank hypocrisy for Trusts to force our workforce into false-employment, without the obligatory assessments, aiming to cause doctors and nurses to be taxed more, whilst contemporaneously engaging in arcane accountancy practices in an attempt to dodge their own tax liabilities arising directly from the same actions.”
HMRC at fault with locums and NHS set to bear brunt
Though the arrangement looks advantageous for NHS bosses in the short-term, it is set to have disastrous consequences in the long run. While the avoidance of millions in tax will inevitably reduce NHS funding, an arguably more pressing matter is the impact on staffing, with many frontline workers abandoning the NHS in response to the public sector Off-Payroll reforms.
In addition to being classed as ‘deemed employees’ without being granted a proper status assessment, as required by the Off-Payroll rules, further exploitation has ensured that many locums have lost a third of their income.
Most significantly, Trusts are unlawfully deducting their employer’s National Insurance (NI) liability, and in many cases the Apprenticeship Levy, from payments made to locums, resulting in a 14% hit to the income of health workers.
Workers’ benefits are also often funded out of locum pay, or not provided at all, while the withdrawal of expenses for ‘inside IR35’ contracts means travelling long distances for work is no longer viable for many locums.
Despite the crippling impact of the changes, the taxman has been eager to point towards a £410m increase in Pay As You Earn (PAYE) and NI as indicative of increased compliance. The calculation was flawed from the offset, as it fails to account for dwindling Corporation Tax and Dividend Tax payments. The fact that the Off-Payroll rules have encouraged aggressive tax avoidance elsewhere is another factor which HMRC and its calculation hadn’t foreseen.
Scandal warrants full scale inquiry
The scandal opens the door for potential convictions for NHS Trustees and intermediaries under the Criminal Finance Act 2017 if they continue to facilitate these schemes. The IHPA claims an estimated 300 NHS providers are believed to be affected.
“Many NHS bosses and accountants will not be resting easily as news breaks and we urge all affected to review their arrangements to ensure they are certain they are all behaving lawfully,” notes Dr Campbell.
While he agrees that the offending Trustees and intermediaries should be brought to justice, Chaplin bemoans the fact that HMRC will escape punishment for the central part it has played in proceedings:
“The disastrous fallout from the reforms, which we have been warning of for months, has been well and truly realised. The most disturbing thing is that the rife non-compliance and exploitation is all HMRC’s doing. This is an utter scandal, and deserving of a full scale inquiry.”