asked Her Majesty's Government:

What will be the cost to National Health Service trusts of the decision by HM Revenue and Customs to disallow recovery of VAT charges on registered medical professionals employed through agencies; and [HL171]

What is the rationale behind the decision of HM Revenue and Customs not to allow recovery of VAT by National Health Service trusts on professionals employed through agencies, including doctors, radiographers and physiotherapists, while continuing to allow such recovery for nurses and administrative and clerical staff. [HL226]

Government departments and NHS bodies can, under special refund arrangements, reclaim the VAT they are charged on certain contracted-out services. This refund scheme is designed to ensure that VAT costs do not create a disincentive for these bodies to contract services out.

This VAT refund scheme is an exception to the normal principles of public funding; that departmental and NHS spending allocations are calculated to take into account VAT costs incurred in the course of delivering public services. As with any such exception, eligibility and definitions are applied strictly.

The services for which VAT refunds are available are specified in an HM Treasury direction. There have been no recent changes to this direction in respect of staff provided through agencies, although HM Revenue and Customs, which administers the refund scheme, has recently clarified the rules in this area. VAT has been reclaimable on nursing services, agency nursing staff and certain administrative and clerical services, since the early days of this VAT refund scheme. In contrast, VAT incurred on the supply of administrative and clerical staff, and the supply of health professionals such as doctors, radiographers and physiotherapists, has never been eligible for refund under the terms of the direction.

The direction is amended periodically and new services are added where a sufficiently strong case has been made for inclusion. HM Treasury recently invited government departments to submit suggestions for the next revision, which we expect to implement early in 2007.

Government departments do not hold any central records of the VAT amounts that have been charged to NHS trusts on the supply of registered medical professionals through agencies.