Isle of Wight NHS Trust v HMRC First Tier Tribunal decision was released in September 2025. This case has major implications for NHS Trusts and recruitment agencies supplying locum doctors across the UK. The parties involved selected this case as a suitable lead case for 13 other NHS Trusts and 7 further recipients of Locums which were stayed pending this decision.
What was it about?
Isle of Wight NHS Trust (The Trust) challenged HMRC’s decision that the supply of locum medical practitioners by third-party agencies should be a taxable supply. HMRC argued that these supplies are subject to VAT at the standard rate (20%). The Trust disagreed and argued that the supplies were exempt from VAT under the provision of a “deputy” registered medical practitioner, under Item 5, Group 7, Schedule 9 of the VAT Act 1994.
The Tribunal’s Decision
The First-tier Tribunal agreed with The Trust and ruled that the supply of locum doctors to NHS Trusts is exempt of VAT. The tribunal clarified that the exemption applies whether the locum is hired to cover for a named doctor or fill a vacant post which is the narrow interpretation HMRC tried to argue. The Tribunal confirmed that the UK law was written more widely than the EU VAT Directive and that UK courts could not narrow this “against the words of parliament”. It was ruled that agencies should not have been charging VAT on these supplies.
Why did the Trust pursue this?
NHS trusts are limited in their ability to recover the VAT they incur due to their activities being largely the non-business provision of NHS funded healthcare, therefore the VAT incurred on locums is usually an irrecoverablecost. This decision which secures VAT exemption on these supplies results in a lower VAT liability overall. The Tribunal was clear that only the supplier of locum staff can recover the overpaid VAT from HMRC under section 80 of the VAT Act 1994 and The Trust must ask their supplier for credit notes to reverse the charge.
Timing Issues
The four-year time limit to submit VAT reclaims to HMRC significantly restricts The Trust’s ability to receive credit notes and for its suppliers to recover overpaid VAT. As this case was lodged for appeal in August 2021 and it relates to earlier periods, any associated claims are out of time and cannot be recovered.
Trusts and recruitment agencies should act promptly to review invoices that still fall within the four-year window and begin the refund process to minimise potential losses.
As the Tribunal stated:
There was no accusation by the Tribunal for any intentional delay by HMRC to limit VAT claims (bearing in mind this case from initial appeal to judgement has taken over four years), but they did note in their report the “fractious history and corporate animosity between the parties”, alongside repeated procedural disputes slowed the progress.
What are the implications from this decision?
Recruitment agencies should stop charging VAT on supplies of locum doctors. Previous invoices will need to be credited, and suppliers can recover overpaid VAT from HMRC under section 80, the VAT Act 1994. Agencies also need to consider the impact of this VAT Exempt income on their past VAT recovery position since the increase in their VAT exempt activities will lead to an increased restriction in their own VAT recovery.
We may see revised guidance and compliance practice advice issued by HMRC in the coming months.
This is a binding lead case for other NHS Trusts. The ruling applies broadly to any locum who is a registered medical practitioner, and the Tribunal explicitly rejected HMRC’s attempted narrow interpretation.
Looking forward
This decision cuts costs for NHS Trusts and gives recruitment agencies clarity on the VAT liability of supplying locum doctors. However, it also creates administrative work: reviewing historic invoices, making refund claims, and reworking VAT recovery calculations.
The bigger picture? This ruling demonstrates how important careful statutory interpretation is in VAT and how far HMRC will try to push a restrictive approach, even where Parliament’s words suggest otherwise.
What the future holds
HMRC has the right to appeal this decision to the Upper Tribunal (UTT). The time limit is 56 days from the release of the decision (unless an extension is granted).
Will HMRC appeal?
It is possible since HMRC has historically defended a narrow interpretation of VATA 1994 Schedule 9 Item 5 and may see this ruling as creating too broad an exemption which encourages further appeals. Whilst the financial implications are significant, particularly the 20 stayed cases, and with many NHS Trusts and recruitment agencies affected nationwide, HMRC may view their position as having limited grounds for challenge since the Tribunals reasoning was based on clear statutory wording, unless HMRC argue there was a legal error in the interpretation.
For now, NHS Trusts and recruitment agencies should proceed on the basis that locum supplies are VAT exempt, which will result in agencies submitting claims to HMRC for overpaid VAT (offset by the restricted VAT impact this will trigger). We will keep you informed of any developments.
If you are affected by VAT matters related to this subject, please do not hesitate to contact the Xeinadin VAT Advisory team for advice on [email protected]
