asked Her Majesty’s Government:
Why National Health Service trusts can recover VAT paid to employment agencies for nurses but not for other health professionals.
My Lords, the scope of the VAT refund scheme for services contracted out by government departments and the NHS is set out in a Treasury direction. Since 1993, this direction has allowed for refund of VAT incurred on agency nursing staff, but it has never allowed for refund of VAT incurred on the supply of any other health professionals. HM Treasury is reviewing the scope of the direction.
My Lords, I am deeply grateful to the Minister for his reply and I very much hope that the review will make some sense of what seems a rather extraordinary situation. However, is he surprised that the direction to NHS trusts on this matter was given without any consultation? Furthermore, given that the review is taking place, can he assure this House that trusts will not be forced to make back-payments of VAT, and, should it be sorted out logically, that some of the trusts will be able to reclaim VAT that perhaps they should not have paid?
My Lords, perhaps I should start by explaining that the VAT refund scheme is an exception to the normal funding principles and is not designed to cover all VAT costs incurred by government departments and the NHS. VAT costs not covered by the refund scheme should be taken into account within the normal funding round for each department. On the process, as I said previously, we inherited the current arrangements that were made in 1993. The direction has been changed from time to time since then, but not in this respect. As I said, a review is under way. I cannot think of circumstances in which changing that would cause trusts to have to make back-payments of VAT, but if I do so after reflection, I certainly shall write to the noble Baroness—but I do not think the matter should be of particular concern.
My Lords, could the Minister confirm that he is aware that whether or not you get VAT back, it is still much more expensive to use agency nurses than your own staff and that many hospitals now try to retain a list of nurses of their own who will come in on call when there is an emergency? That saves much more than the amount of VAT.
My Lords, one can see the merit of trusts making such arrangements. However, overall agency spending is down and is continuing to decline. The bill was £1.4 billion in 2003-04 and £1.3 billion in 2004-05, so it has gone from 5.1 per cent to 4.2 per cent of the pay bill—the lowest for six years.
My Lords, does the Minister agree that the Answer he gave seems rather strange in terms of the current rules? There seems no logic in treating nurses one way and other health staff in another. While I am pleased to hear that a review is under way, can he give us any idea of its timetable? Reviews can take months, years and Parliaments, and it would be a good idea to have this review sorted out quickly.
My Lords, the review involves the Treasury seeking views from the departments that might be affected by the VAT rules. In the latest round of discussions, requests by departments were due to be submitted by 30 November. No date has been set for the final consideration of those deliberations, but I would expect that to happen within a reasonable period.
My Lords, the Minister gave the noble Baroness, Lady Neuberger, the welcome news that a review was being undertaken. We are regularly told by Treasury Ministers in this House and in another place that VAT cannot be changed in various directions because of the European VAT directives. What is the relationship between this review and the current directives?
My Lords, it is true that the current directive binds the basic premise on which the tax is levied and constrains the UK in, for example, changing rules for exemptions or zero-rating. But the Treasury direction has been changed from time to time since 1993, which was the position that we inherited in respect of agency nurses. I do not believe that the EU treaties and our obligations are a constraint on changing the direction sensibly.
My Lords, can the Minister explain the position of non-nursing staff provided by NHS Professionals to NHS trusts and can he assure the House that such staff are on a level playing field with staff provided by other employment agencies, given the emergence of this non-deduction of VAT?
My Lords, there is a difference at the moment, which is the thrust of the question. The difference is dealt with in funding. In so far as VAT is borne on those costs by trusts and so on, it should be built into their up-front budgets. If it falls within the nursing agency arrangements, it is obviously not built in because the VAT is refunded and not borne by the trust. A key issue here is that the supply of care or treatment generally would be an exempt supply but, when these supplies come via agency arrangements, the supply is that of staff and therefore incurs VAT. That is part of the issue that needs to be addressed.