How changes to VAT for locum doctors will impact medical recruiters

HMRC has issued an update that could change the VAT position for agencies supplying locum doctors and other temporary medical staff. In this blog, we share what HMRC has published, and the potential commercial impact for medical recruiters.

Even if you’ve never had to think too hard about VAT before, this one matters because it could affect what you charge, what you can reclaim, and what NHS Trusts may now ask you to repay.

What has HMRC published?

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

The policy paper follows a First-tier Tribunal decision in Isle of Wight NHS Trust and others. HMRC’s updated view is that certain supplies of temporary medical staff (specifically locum doctors in the circumstances covered) are VAT exempt, and HMRC also sets out how to claim a refund of output VAT if you’ve overdeclared it in the past 4 years.

The key point for agencies: VAT exemption can sound as simple as “you don’t charge VAT on your sales invoices”. In reality, exemption has a knock-on effect: it can restrict your ability to reclaim VAT on your costs. That is where the commercial impact lands.

Why VAT exemption can be bad news for medical recruiters

If you make standard-rated sales, you charge VAT to your clients and you can normally reclaim VAT charged to you on your business costs, such as umbrella company costs (subject to the normal VAT rules).

When you make exempt sales, you do not charge VAT to your client, but you also cannot reclaim VAT on costs that relate to making those exempt supplies. In addition, you may have to restrict how much VAT you reclaim on overheads (this is where partial exemption comes in).

That’s the commercial sting in the tail. Many agencies have cost lines that include VAT, and the moment sales move into exemption, that VAT can become an unrecoverable cost that comes straight off the bottom line.

What this could do to profit margins: a simple example

Here’s a simplified illustration of how VAT exemption can squeeze an agency profit margin.

Assume the medical recruiter supplies a locum doctor and uses an outsourced model, such as an umbrella company, where VAT is charged on cost.

• The agency’s cost (plus VAT) is £150 + £30 VAT = £180 paid out.
• The agency charges the Trust £187.50 for the assignment (a £37.50 gross margin on the £150 base cost).

If the agency’s sale is VAT exempt, it charges £187.50 with no VAT, but it may not be able to reclaim the £30 VAT on the cost. That £30 becomes a real cost.

Result: the £37.50 gross margin effectively drops to £7.50 after the irrecoverable VAT. That is a dramatic margin squeeze and, for many businesses, it turns a workable model into one that is not commercially viable unless pricing and/or operating model changes.

This is why the sector is so concerned. The issue isn’t a technical VAT debate; it’s whether businesses can still trade sustainably.

What you may be dealing with immediately

1. Pressure from NHS Trusts about historic VAT

We’re already hearing that some Trusts are contacting agencies asking for VAT to be repaid for past periods, on the basis that VAT “should not” have been charged.

If you receive this request, it can feel urgent. However, it is not something to agree to quickly without understanding the full knock-on impact on cash flow and profitability.

2. The four-year “refund” process

HMRC’s brief explains how to claim a refund of overdeclared output tax (VAT charged to clients) if you’re affected.

The catch is that any adjustment on outputs (VAT you charged) may force you to revisit inputs (VAT you reclaimed). If you use umbrella companies or outsourced payroll providers the VAT reclaimed on this invoices, will need to be repaid to HMRC.

3. The process going forward

Many agencies will be asking the same question: should we stop charging VAT now?

The VAT position will depend on the facts, including what is being supplied, who is supplying it, what the contracts say, and whether the arrangement falls within the exemption HMRC is talking about. A blanket “stop charging VAT” approach can store up bigger problems if the facts don’t match.

You may also need to revisit your supply chain to determine what incur VAT – for example if you use an umbrella company, you may look to switching to employing the locums directly.

In addition, some businesses may need to revisit their supply chain and operating model. For example, if you use an umbrella company, you may look to switching to employing the locums directly. That is a major commercial and operational decision, and it needs to be worked through carefully.

What to do right now if you run a medical recruitment business

If you take only one thing from this blog, let it be this: don’t rush into historic refunds or changing VAT treatment without checking the facts and modelling the impact.

Start by getting absolute clarity on what you supply and how your contracts are structured. In VAT, the detail really matters.

Next, identify where VAT sits in your cost base. If you use umbrellas or outsourced services where VAT is charged, quantify how much VAT you currently reclaim and what happens to your margin if that VAT becomes irrecoverable.

If a Trust requests repayment of VAT, treat it as a managed process rather than an immediate action point. You will want to understand the basis of the request, the contractual position, and what it triggers on your side, including VAT return adjustments and potential restrictions on input VAT recovery.

Finally, watch the sector response. From what we are hearing, both APSCo and the REC may look to coordinate an industry view. There may be a “watch this space” element here, particularly around how Trusts approach historic VAT claims and how HMRC expects agencies to handle past periods.

 

Where we are now

At the time of writing, there is not a one-size-fits-all solution we can responsibly publish as “the answer” for every medical recruiter. The VAT treatment depends on the facts, and the commercial impact depends on your cost base and operating model.

What we can say with confidence is that this HMRC update has the potential to create immediate operational pressure (particularly from Trusts) and significant financial impact through restricted VAT recovery. If you’re in this space, it is worth treating as a board-level issue, not a back-office VAT tidy-up.

If you’d like support, we can help you map the supply chain, assess the VAT treatment against your facts, and model the financial impact (including partial exemption implications) so you can make informed decisions quickly. Get in touch to discuss how we can support you.