Exclusive: Treasury warns NHS trusts over tax avoidance

In a letter seen by ITV News, a senior Cabinet minister has warned hospital trusts about using schemes to avoid paying tax.

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In June, ITV News revealed that as many as 30 NHS trusts in England were using new forms of short term contracts, on which tax is not payable, rather than using the traditional agency model where locum agencies charge the hospital a fee and VAT on top.

But the Chief Secretary to the Treasury, Danny Alexander, has said that hospital trusts must either employ temporary locum doctors like normal staff or pay VAT on the cost of hiring them.

In the letter to the Recruitment and Employers Confederation (REC), that represents employment agencies he writes:

Sources told us that the schemes, developed by big accountancy firms, were created for the principle reason of avoiding tax, a practice that is forbidden in the public sector.

We were told that the firms pushing the contracts were like 'second hand car salesmen', and that it was clear the system was being abused, with some doctors essentially being hired for sometimes one shift at a time, some having as many as 200 P45s.

• Read more: NHS tax avoidance investigated

We've seen an employment contract from one Midlands trust where it clearly shows a doctor being employed for a single day.

A document from the Sherwood Forest Trust described the scheme as the 'PWC VAT avoidance model.'

And since June, we have seen evidence that shows accountancy firms selling the schemes have already racked up fees of more than £7 million.

In response to our story in June, the HMRC announced that they would investigate what was happening at the trusts using the model. Now, the view from the top of government appears to be that the practice of using very short term contracts should be stamped out.

With pressure on budgets it is understandable that NHS managers want to try to save money where they can.

But it seems that employing people in this way, and therefore avoiding tax, will not be tolerated by the taxman.

Alexander promises: "HMRC will robustly challenge tax avoidance schemes and artificial arrangements designed to reduce VAT liability."

The chief executive of the REC, Kevin Green, said: "Concerns about risky tax avoidance schemes are being heard at the very top of government and action will be taken.

"These models are being promoted by big accountancy firms to an NHS under increasing financial pressure and their legality is starting to unravel."