PCNs and VAT: Navigating the complexities - Long Read 

We apologise for the Long Read!

This subject is complex, and once we'd researched it thoroughly, we realized it couldn't be easily condensed without losing vital details. Therefore, we wanted to share this comprehensive "long read" article first. We will attempt to extract practical excerpts and create more condensed, actionable summaries in later articles.

Disclaimer

This article provides general information regarding VAT risks in GP collaboration and Primary Care Networks (PCNs). While we have strived to ensure the accuracy and thoroughness of the information presented, this article is not intended to constitute legal or accounting advice. Due to the complex nature of VAT legislation and its application to PCN structures, we strongly advise you to seek thorough and tailored professional advice from qualified specialist accountants or legal advisors with expertise in UK healthcare VAT. The information in this article is based on publicly available guidance and expert commentary as of the date of compilation and may be subject to change. Reliance on the information provided in this article is solely at your own risk.

Executive Summary

While the core medical services provided by General Practitioners (GPs) in England are typically exempt from Value Added Tax (VAT), the collaborative working models inherent in Primary Care Networks (PCNs) and GP Federations introduce significant VAT complexities and potential liabilities. Operational arrangements essential for network functioning, such as sharing staff funded through the Additional Roles Reimbursement Scheme (ARRS), levying management charges, pooling funds, and supplying services between member practices, can inadvertently trigger standard-rated VAT (currently 20%). This report provides an essential guide for Practice Managers, GP Partners, and PCN/Federation leads in England to understand and navigate these challenges.

The primary VAT risks stem from the distinction between the VAT-exempt supply of medical care and the potentially taxable 'supply of staff' when personnel work across multiple practices but are employed by a single entity. Furthermore, management fees charged by lead practices or federations, including payments for Clinical Director (CD) roles, are generally viewed by HM Revenue & Customs (HMRC) as taxable management services, not exempt healthcare. The handling of pooled funds requires careful structuring to avoid VAT on fund movements, but this does not negate potential VAT on the underlying services purchased with those funds. Cross-charges for administrative support or equipment also represent taxable supplies.

Failure to correctly identify and account for VAT can lead practices or federations to unexpectedly exceed the VAT registration threshold (currently £90,000 taxable turnover in any 12-month period, increased from £85,000 as of 1 April 2024 ¹). This necessitates VAT registration and the charging of VAT on taxable supplies, which is often irrecoverable by the recipient practices making mainly exempt supplies. This 'VAT leakage' can significantly reduce budgets intended for patient care and service development.²

Mitigation strategies exist, including structuring staff arrangements through joint employment contracts, carefully managing taxable supplies to remain below the VAT threshold, utilising GP Federations to provide services (if structured correctly), or establishing formal VAT Cost Sharing Groups (CSGs). The effectiveness of these strategies depends heavily on meticulous planning, robust legal agreements with specific contractual wording, and ongoing administrative diligence.

1. Understanding VAT in English General Practice

1.1 Core VAT Principles

Value Added Tax (VAT) is a consumption tax applied to most goods and services that are bought and sold for use or consumption in the UK.⁹ Businesses act as collectors of VAT on behalf of HMRC. When a VAT-registered business makes supplies of goods or services, it charges VAT (output tax) to its customers. Conversely, it can generally reclaim the VAT it pays on its own purchases and expenses (input tax), provided these costs relate to the taxable supplies it makes.¹

Supplies fall into different categories for VAT purposes:

• Standard-rated: Most goods and services are subject to the standard rate, currently 20%.⁵

• Reduced-rated: Some specific supplies (e.g., domestic fuel, power) are taxed at 5%.

• Zero-rated: Certain essential goods and services (e.g., most food, books, children's clothes, prescribed drugs under specific conditions) are taxed at 0%. Businesses making zero-rated supplies can still reclaim input VAT related to those supplies.¹

• Exempt: Some supplies, including many healthcare services, are exempt from VAT. Businesses making exempt supplies do not charge VAT but generally cannot reclaim any input VAT incurred on costs related to making those exempt supplies.²

VAT registration is compulsory for any business whose turnover of taxable supplies (standard-rated and zero-rated) exceeds the registration threshold in any rolling 12-month period.² The threshold was £85,000 for many years but increased to £90,000 from 1 April 2024.¹ Once registered, a business must charge VAT on its taxable supplies, file regular VAT returns (usually quarterly), and pay any net VAT due to HMRC.¹

1.2 The Medical Services Exemption

The most significant VAT provision for GP practices is the exemption for medical services, detailed in VAT Act 1994, Schedule 9, Group 7 and elaborated upon in HMRC guidance, primarily VAT Notice 701/57.¹² For services provided by registered health professionals to be exempt, two specific conditions must both be met ¹²:

1. Professional Scope: The services must fall within the profession in which the individual providing the service is registered to practice (e.g., a registered doctor providing medical services, a registered nurse providing nursing services).¹² The list of qualifying health professionals includes doctors, dentists, opticians, pharmacists, nurses, midwives, osteopaths, chiropractors, and recently added pharmacy technicians in Great Britain.¹²

2. Primary Purpose (Medical Care Test): The primary purpose of the service must be the protection, maintenance, or restoration of the health of the individual patient concerned.¹² This includes diagnosis, treatment, and prevention of illness or injury.¹²

Services explicitly considered by HMRC to meet this primary purpose test include those delivered under NHS contracts like General Medical Services (GMS), Personal Medical Services (PMS), and Alternative Provider Medical Services (APMS).¹² Other examples include diagnosis of illness, analysis of samples for diagnosis, nursing care provided in a patient's home, and certain health screening assessments aimed at preventing work-related ill health.¹²

However, HMRC applies this exemption narrowly.⁵ Services where the primary purpose is not deemed to be the protection, maintenance, or restoration of health are taxable at the standard rate. Examples include purely cosmetic procedures (unless medically necessary, e.g., reconstructive surgery after an accident), paternity testing, writing articles for journals, and providing expert witness services for legal cases.⁵ General administrative services are also typically taxable.¹² Services provided by staff who are not registered health professionals are generally taxable unless they are directly supervised by an appropriate registered professional or provided within a qualifying institution like a hospital or state-regulated care home.¹²

Separately, the supply of qualifying drugs and medicines dispensed by a registered pharmacist (or authorised person) to an individual for their personal use based on a prescription from a relevant practitioner is zero-rated, provided specific conditions are met.¹² This zero-rating was temporarily extended to cover certain medicines supplied under Patient Group Directions (PGDs) until 31 March 2027.²¹

1.3 Partial Exemption Challenges

Most GP practices derive the vast majority of their income from providing VAT-exempt medical care under NHS contracts.¹² As they make predominantly exempt supplies, they are typically not required (or able) to register for VAT, and consequently, they cannot recover the input VAT they incur on their expenses (e.g., on equipment, consumables, overheads).²

However, if a practice begins to make taxable supplies (standard-rated or zero-rated) – for example, dispensing drugs (zero-rated), providing certain non-NHS reports or medicals (standard-rated), or potentially charging other PCN members for staff or administrative services (standard-rated) – and the value of these taxable supplies exceeds the £90,000 threshold in a 12-month period, the practice must register for VAT.¹

Such a practice becomes 'partly exempt' because it makes both taxable and exempt supplies.¹ This triggers complex VAT accounting requirements. The practice must determine how much of the input VAT it incurs relates directly to its taxable supplies (which is recoverable), how much relates directly to its exempt supplies (which is irrecoverable), and how much relates to overheads used for both (which must be apportioned).¹

The irrecoverable input VAT related to exempt supplies can only be reclaimed if it falls below certain 'de minimis' limits – broadly, if it averages £625 or less per month and does not exceed 50% of the total input tax for the period.¹ If the irrecoverable VAT exceeds these limits, it represents a direct cost to the practice.

Consequently, practices facing partial exemption encounter significant administrative burdens in performing these calculations for every VAT return.¹ Furthermore, there can be a financial disincentive, particularly if the level of taxable activity is only slightly above the de minimis threshold. The practice must charge 20% VAT on its taxable supplies but may only be able to recover a small proportion of its overall input VAT, making the taxable activity less financially attractive and increasing compliance costs. This complexity often encourages practices to structure their affairs to avoid triggering VAT registration or to minimise taxable supplies where possible.

2. VAT Complexity in PCN and Federation Collaboration

2.1 Why Collaboration Creates VAT Issues

The establishment of PCNs and the increasing role of GP Federations aim to foster collaboration, enabling practices to work at scale, share resources, and deliver integrated care.²³ However, this very collaboration introduces VAT complexities that do not typically arise for standalone practices. PCNs generally involve multiple GP practices, and sometimes a separate Federation entity or a bespoke PCN company, working together under a Network Contract Directed Enhanced Service (DES).²

This collaborative model frequently necessitates one entity within the network providing resources or services to others. Common examples include:

• A lead practice or federation employing ARRS staff who work across all member practices.¹

• A lead practice or federation providing administrative support or management functions for the network.²

• A Clinical Director, often a partner in one practice or employed by a federation, providing leadership across the PCN.³

• Practices sharing equipment or premises space.²

While the ultimate objective of these arrangements is the delivery of VAT-exempt patient care, the intermediate supplies made between the collaborating entities themselves may not qualify for the medical services exemption.² Under VAT law, the provision of staff, administrative support, or management services from one business entity to another is generally considered a standard-rated (taxable) supply.²

This creates a significant risk of VAT being charged on these inter-entity transactions. If the entity making the supply (e.g., the lead practice or federation) is VAT-registered (or becomes liable to register because these supplies push it over the £90,000 threshold), it must charge 20% VAT to the other PCN members.² Since the recipient practices primarily make VAT-exempt supplies, they generally cannot recover this input VAT.² The result is a 'VAT leakage', where funds intended for frontline services are lost to irrecoverable tax, potentially reducing the PCN's available budget by up to 20% on affected costs.³

2.2 Overview of Common Structures

PCNs have adopted various operational structures, each with different VAT implications.²³ Common models include:

• Flat Practice Model: Staff are jointly employed by all member practices under shared contracts.¹

• Lead Practice Model: One practice employs the staff and potentially provides management, receiving funding on behalf of the network.⁶

• Federation Model: A GP Federation employs staff and/or delivers services under contract to the PCN.¹

• Hybrid Model: A mix, where different practices employ different staff members, with funds channelled via a nominated payee.²⁶

• PCN Company Model: A separate legal entity (company) is established by the PCN members to employ staff and/or deliver services.¹

A fundamental factor driving VAT complexity is that a PCN itself is typically a network or collaboration defined by the DES, not a distinct legal entity in its own right.² Consequently, the PCN cannot usually directly employ staff, hold contracts independently (funding flows via a nominated payee holding a primary care contract ²), or register for VAT. All transactions must therefore occur between the existing legal entities involved (the individual GP practices, the federation, or a specially formed PCN company). This inherent need for inter-entity supplies is precisely what triggers scrutiny under VAT legislation and creates the potential pitfalls discussed below.

3. Common VAT Pitfalls in PCNs and Federations

Navigating the VAT implications of collaborative working requires awareness of several common pitfalls that can lead to unexpected liabilities and administrative burdens.

3.1 Staff Sharing and the 'Supply of Staff' Trap

The Problem: A frequent arrangement involves one entity within the PCN – typically a lead practice, a GP federation, or a dedicated PCN company – employing staff (such as ARRS roles like clinical pharmacists, physiotherapists, paramedics, social prescribing link workers, or administrative support staff) who then work across multiple member practices.¹ When the employing entity receives payment or reimbursement for the cost of these staff, often drawn from pooled PCN funds, HMRC is likely to classify this arrangement as a taxable 'supply of staff'.¹

This classification often surprises practices, as the staff involved may be registered health professionals delivering patient care. However, from a VAT perspective, the crucial distinction lies in what is being supplied between the entities. If the employing entity is essentially providing personnel who work under the direction and control of the recipient practices, it is supplying staff (taxable). If, however, the employing entity retains direction and control and is directly responsible for delivering a healthcare service to the end patient using its staff, it may be making an exempt supply of medical services.¹² This distinction is subtle and fact-dependent.

HMRC Guidance and Interpretation: VAT Notice 701/57, section 6, provides guidance on supplies of health professional staff, distinguishing between taxable staff supplies (where a third party directs the worker) and potentially exempt healthcare supplies (where the supplier directs the worker to provide care directly).¹² Case law, such as HMRC v Rapid Sequence Ltd, supports the view that supplies of medical professionals by an agency or company to another entity (like a hospital or clinic) can be standard-rated.⁶

While NHS England guidance has suggested that services provided by ARRS roles might meet the conditions for VAT exemption regardless of the employment structure ¹⁷, it crucially notes that this interpretation has not been formally agreed by HMRC.¹⁷ Relying solely on this interpretation carries risk, particularly given HMRC's tendency to apply exemptions narrowly ⁵ and instances where official guidance may require careful scrutiny.²²

Consequences: If the employing entity's total taxable turnover, including the value attributed to the staff supplied to other members, exceeds the £90,000 VAT registration threshold, it must register for VAT.² It will then be required to charge 20% VAT on the value of the staff supplied to the other PCN practices. This VAT charge becomes an additional cost to the PCN, as the recipient practices, making predominantly exempt supplies, cannot typically recover it.² As PCN workforces expand under the ARRS, the value of these potential staff supplies increases, making it more likely that the VAT threshold will be breached.¹

3.2 Management Charges & Clinical Director Fees

The Problem: It is common for GP Federations or designated lead practices to levy management charges on PCN members to cover the costs of coordinating network activities, administration, governance, and leadership. A specific area of concern relates to the funding provided for the PCN Clinical Director (CD) role. Payments made for these management and leadership functions are generally considered by HMRC to be taxable supplies.³

HMRC Stance: HMRC's position, clarified following queries from bodies like the Association of Independent Specialist Medical Accountants (AISMA), is that the core function of a CD typically involves the 'leadership and management' of the PCN – supporting practices with planning, direction, and governance – rather than being 'directly concerned with the protection, maintenance or restoration of the health of the patient'.³ This view contrasts with initial assumptions held by some that CD work, often undertaken by a GP, might fall under the medical services exemption.³ While management services could potentially be exempt if they are purely ancillary to a principal supply of exempt healthcare, this is unlikely to apply to standalone CD or general PCN management roles.³ Therefore, even if the CD is a registered GP, the supply of their time for management purposes may not qualify for exemption.²³

Consequences: The entity providing the CD or management service (which could be a lead practice, a federation, or potentially the CD themselves if contracted individually) must consider the value of these fees alongside any other taxable supplies they make. If the total exceeds the £90,000 VAT threshold, VAT registration is required, and 20% VAT must be charged on the management fees.³ This adds a further irrecoverable cost to the PCN budget. The way CD funding is handled – whether paid to the CD's practice to fund backfill or as direct remuneration – can also influence the VAT analysis and requires careful consideration.³⁴

3.3 Handling Pooled Funds (DES Payments, etc.)

The Problem: PCN funding streams, such as the core DES payments and ARRS reimbursements, are typically paid by the commissioner to a single nominated payee – usually one of the member GP practices or an eligible GP Federation.² A key VAT challenge is ensuring that the subsequent distribution or use of these funds within the network does not create unintended VAT liabilities.

'On Trust' Arrangement: The widely recommended approach to manage the flow of funds is to ensure the Network Agreement explicitly states that the nominated payee receives and holds all PCN funds 'on trust' for the benefit of all the PCN member practices.² This legal construct clarifies that the funds do not belong to the payee entity itself but are held collectively for the network's purposes. Structuring the arrangement such that the payee acts as a 'disclosed agent' for the other members can further support this position.¹⁷ The intention of this arrangement is to ensure that the mere transfer of funds from the nominated payee to other member practices (e.g., to reimburse them for staff costs they have incurred) falls outside the scope of VAT, as it is not considered payment for a supply made by the payee.¹⁷

Avoiding 'Invoices': To reinforce the 'on trust' principle and avoid inadvertently creating evidence of a supply, it is advisable for the nominated payee to issue 'requests for payment' or similar documentation when transferring funds internally or requesting contributions from members, rather than using formal 'invoices', which HMRC often associates with taxable supplies.²⁶

VAT on Underlying Spend: It is absolutely critical to understand that the 'on trust' arrangement addresses only the VAT status of the movement of the pooled funds. It does not alter the VAT liability of the underlying supplies that are purchased using those funds.² If the pooled funds are used by the PCN members to pay for services supplied between themselves that are taxable – such as the supply of staff from a lead practice to other members, or management fees charged by a federation – then VAT is still potentially due on those underlying supplies, irrespective of the 'on trust' status of the funding pot.² Believing that an 'on trust' clause solves all PCN VAT issues is a dangerous misconception.

Accounting for Funds: Robust accounting practices are essential. PCN funds must be clearly identifiable and segregated from the nominated payee's own finances, especially if the payee is a Federation managing multiple contracts and PCN accounts.³⁵ Any surpluses remaining from PCN funding streams at the end of the financial year need careful consideration regarding their accounting and tax treatment, as they may constitute taxable income for the member practices unless specific commitments for their use exist.²³ Poor record-keeping not only risks inaccurate financial reporting but also complicates VAT analysis and potential HMRC scrutiny.³⁵

3.4 Inter-Entity Service Supplies (Admin, Equipment, etc.)

The Problem: Beyond staff and formal management charges, PCNs and Federations may involve the sharing of other resources where one entity provides a service to others. This could include administrative support, back-office functions (like IT or HR support), the use of shared equipment, or charges for utilising space within a practice's premises.² If one practice or entity makes a charge to other PCN members for these types of non-medical services, these supplies are generally standard-rated for VAT.²

Consequences: As with staff supplies and management charges, the entity providing these services must aggregate the value of these charges with any other taxable supplies it makes. If the total exceeds the £90,000 VAT registration threshold, the entity must register for VAT and charge 20% on these supplies.² Again, this VAT is typically irrecoverable by the recipient practices, leading to increased costs for the network.

Summary Table: Common VAT Pitfalls in PCNs and Federations

4. Strategies for Mitigating VAT Exposure

Given the potential for significant irrecoverable VAT costs within PCN and Federation structures, careful planning and consideration of alternative operating models are essential. Several strategies can help mitigate VAT exposure, particularly concerning shared staff.

4.1 Joint Employment Contracts ('Flat Structure')

Mechanism: In this model, all GP practices that are members of the PCN jointly employ the shared staff (e.g., ARRS roles) under common contracts of employment.¹ While one practice might handle the administrative aspects of payroll, legally, the employment relationship exists between the staff member and all participating practices collectively.

VAT Impact: Because the staff are employees of all the practices simultaneously, any payments made between the practices relating to the staff's salary costs are typically viewed by HMRC as the sharing of employment costs or reimbursement of wages, rather than consideration for a taxable supply of staff from one practice to another.⁶ This structure is therefore generally considered to be the safest model from a VAT perspective regarding staffing arrangements.⁶

Pros:

• Effectively eliminates the VAT risk associated with the 'supply of staff' between members.⁶

• Staff employed under this model by qualifying practices typically retain access to the NHS Pension Scheme.⁶

Cons:

• Legally and administratively complex to establish and manage.²⁵ Requires carefully drafted joint employment contracts and potentially complex network agreements.⁶

• Creates joint and several liability for all participating practices regarding employment obligations and potential claims (e.g., redundancy, disputes).⁶

• Practical challenges can arise in managing staff across multiple employers, such as coordinating leave, addressing grievances, and ensuring consistent application of policies, especially if practices have differing terms and conditions.⁷

4.2 Sharing Staff Below the VAT Threshold ('Hybrid' or Distributed Employment)

Mechanism: This approach involves distributing the employment of the PCN's shared workforce among several member practices. For example, Practice A might employ the clinical pharmacist, while Practice B employs the social prescribing link worker.²⁵ The nominated payee practice receives the PCN funding and reimburses the respective employing practices for their staff costs.

VAT Impact: It is important to recognise that this model still involves a supply of staff from the employing practice to the other practices within the PCN where the staff member works.²⁵ However, VAT only becomes chargeable if the entity making the supply (the individual employing practice) is registered or liable to be registered for VAT. Therefore, if the value of the staff supplied by each individual employing practice, when added to any other taxable supplies that practice makes, remains below the £90,000 VAT registration threshold, then that specific practice does not need to register for or charge VAT on its supply of staff.¹

Pros:

• Can delay the need for VAT registration for individual practices, provided their taxable turnover stays below the threshold.²⁵

• Staff employed by qualifying practices generally retain NHS Pension access.²⁵

Cons:

• Often only a short-term solution, as increasing staff numbers and associated costs are likely to push individual practices over the VAT threshold in the future.²⁵

• Administratively complex, requiring careful tracking of costs and reimbursements across multiple employers.²⁵

• Potential for inconsistent employment terms and conditions across the PCN workforce.²⁵

• Each employing practice bears the full employment liability for the staff on its payroll.²⁵

• Requires diligent monitoring of each participating practice's taxable turnover to ensure the VAT threshold is not inadvertently breached.

4.3 Utilising a GP Federation

Mechanism: The PCN member practices can contract with a local GP Federation (which may or may not be a formal member of the PCN) to employ the shared workforce and/or deliver specific services required under the DES.¹ Funding is channelled to the Federation (either directly, if it holds a qualifying primary care contract, or via the nominated payee practice) to cover the costs.³¹ The Federation then manages the staff and service delivery.

VAT Impact: The VAT treatment of this arrangement is highly dependent on the precise nature of the supply being made by the Federation to the PCN practices:

• If the Federation is simply providing staff who work under the direction of the PCN practices, this is likely to be viewed as a taxable supply of staff.²⁶

• However, if the Federation contracts to deliver specific services (e.g., a clinical pharmacy service, a social prescribing service) and uses its employed staff under its own direction and control to fulfil that service obligation directly to patients or the practices, the supply could potentially qualify for VAT exemption. This might be under the medical services exemption (if the service meets the criteria and is delivered by appropriate professionals) or the welfare services exemption (if the Federation qualifies as a state-regulated provider and the service is a welfare service).²⁶ For this to apply, the Federation must be demonstrably responsible for overseeing and delivering the service itself, not merely acting as a staff agency.²⁶

• The Federation's eligibility for the welfare services exemption may require confirmation, as it might not automatically be considered a 'state regulated private welfare institution' in the same way a GP practice often is.²⁶

• Crucially, the wording of the contract between the PCN practices and the Federation is paramount. It should clearly define the arrangement as a contract for the provision of specified (ideally exempt) services, potentially referencing that PCN funds are held on trust by the Federation for this purpose, rather than framing it as a supply of staff.²⁶

Pros:

• Can simplify employment administration and liability for the individual GP practices.¹

• Federations, particularly those holding primary care contracts, may already be established NHS employing authorities, facilitating NHS Pension access for staff.¹

• Offers a potential route to VAT exemption if the arrangement is carefully structured and documented as a supply of exempt medical or welfare services.⁷

Cons:

• PCN practices relinquish direct control over the employed staff.²⁵

• Federations may charge substantial administration or management fees for providing the service, which could themselves be subject to VAT.²⁵

• Significant VAT risk remains if the arrangement is not meticulously structured and evidenced as a supply of exempt services, leaving it vulnerable to being treated as a taxable supply of staff.²⁶

4.4 The Cost Sharing Group (CSG) Solution

Mechanism: This involves the PCN member practices collaborating to form a new, separate legal entity – the Cost Sharing Group (CSG). This entity is typically structured as a company (e.g., limited by guarantee or shares) or potentially an LLP, and its members are the participating GP practices.¹ The CSG is established specifically to provide certain services (often including the employment and management of shared PCN staff) exclusively to its members.

VAT Impact: The key benefit of a properly constituted CSG is that the supplies of services it makes to its members can be exempt from VAT, provided a strict set of conditions, derived from EU law and implemented into UK legislation, are met.²⁵ This exemption specifically targets situations where organisations with exempt activities (like GP practices) pool resources to achieve efficiencies, avoiding the VAT cost that would arise from charging between members directly.

Conditions for CSG Exemption (Essential Requirements):

1. Independent Group: The CSG must be an independent legal entity, distinct from its members.³⁷ It needs a membership structure allowing members to influence its activities.³⁸

2. Eligible Members: All members of the CSG must primarily carry out activities that are exempt from VAT (like medical care) or are non-business activities for VAT purposes.³⁷ HMRC guidance suggests a threshold (e.g., at least 5% exempt/non-business supplies) may apply for eligibility.³⁷ GP practices typically meet this condition.

3. Directly Necessary Services: The services supplied by the CSG to its members must be directly necessary for the members' own exempt or non-business activities.³⁷ Services that support members' taxable activities do not qualify for the exemption.³⁹ If a member's activities are almost entirely exempt/non-business (e.g., >85%), HMRC may accept all services received from the CSG as directly necessary.³⁷ This condition requires careful definition of the services provided by the CSG.

4. Exact Cost Reimbursement: The CSG must only recover from its members their precise share of the expenses incurred by the CSG in making the exempt supplies to them. The CSG cannot be set up to make a profit from these transactions, and no dividends can be paid from surpluses generated by these activities.²⁵ It can hold surpluses temporarily to manage cash flow but must aim for break-even over the longer term.²⁹ Costs must be allocated accurately between members.

5. No Distortion of Competition: The application of the exemption must not be likely to cause a distortion of competition.³⁷ This generally means the CSG should not be operating in a commercial market or effectively acting as an outsourcing provider for services readily available elsewhere.

Pros:

• Provides a formal, legally recognised structure for shared PCN functions and employment.³²

• Can effectively eliminate irrecoverable VAT on the shared services (including staff) provided by the CSG to its members, provided all conditions are rigorously met.¹

• Allows for consistent terms and conditions for all staff employed by the CSG.²⁵

• May offer potential corporation tax advantages on any retained surpluses compared to practice profit allocation.³²

Cons:

• Significant complexity and cost involved in setting up the legal entity, drafting members' agreements, and establishing governance structures.³

• Requires ongoing, meticulous administration to ensure strict adherence to all the exemption conditions, particularly around cost allocation and the 'directly necessary' requirement.¹

• The CSG entity will require its own accounting systems and potentially separate registration for PAYE and Corporation Tax.³²

• Access to the NHS Pension Scheme for staff employed by the CSG is not automatic and requires a separate application and determination process.²⁵

• Requires specialist legal and accountancy advice throughout the setup and operational phases.³ Potential complexities arise if VAT grouping is considered (e.g., if one member controls the CSG).³⁸

The CSG model presents challenges, particularly regarding the "directly necessary" and "exact cost reimbursement" rules within the dynamic funding environment of PCNs. If CSG-provided services support both exempt and any taxable activities of member practices, allocating costs accurately becomes difficult, potentially jeopardising the exemption.³⁹ Managing fluctuating income streams (like performance-based IIF funding ³⁵) within a strict cost-recovery model demands sophisticated financial oversight to avoid breaching the non-profit requirement.²⁹

4.5 Contractual Best Practices

Regardless of the chosen operational model, careful drafting of legal agreements is crucial for managing VAT risk:

• Network Agreement Wording: The main Network Agreement, along with any associated schedules or sub-contracts, must be drafted with VAT implications clearly in mind.²

• Explicitly state that the nominated payee holds PCN funds (especially DES payments) 'on trust' for the collective benefit of the member practices.²

• When engaging a Federation or other third-party provider, the contract should clearly define the supply as being one of services (ideally specifying exempt medical or welfare services) rather than merely a supply of staff. It should also clarify that the provider retains direction and control over the staff delivering the service.²⁶

• Detail any cost-sharing or reimbursement mechanisms precisely, using language consistent with cost recovery rather than profit-making charges between members.

• Avoiding 'Invoices' for Internal Transfers: As previously mentioned, practices should use terminology like 'request for payment' or 'contribution request' for internal fund movements or cost allocations between the nominated payee and members, or between members themselves. Avoid issuing formal 'VAT invoices' for these internal transactions, as this can imply to HMRC that a taxable supply has occurred.²⁶

Summary Table: Comparison of VAT Mitigation Strategies for Staffing

5. Applicable VAT Exemptions and Reliefs

Understanding the available VAT exemptions is crucial when structuring PCN and Federation activities.

5.1 Medical Services Exemption (Recap)

As detailed in Section 1.2, the primary exemption relevant to core GP activities covers medical services provided by appropriately registered health professionals (or those directly supervised by them under specific conditions), where the principal purpose is the protection, maintenance, or restoration of patient health.¹² This remains the foundation for exempting direct patient care delivered by practices, but its application to inter-entity supplies within a PCN is limited, particularly concerning staff provision and management services.

5.2 Welfare Services Exemption

An alternative exemption exists for the supply of welfare services (VAT Act 1994, Schedule 9, Group 7, Item 9). This exemption applies when welfare services are supplied by charities, public bodies, or 'state-regulated private welfare institutions or agencies'.³⁶ Welfare services encompass care, support, and assistance provided to vulnerable groups, including children, the elderly, and those with disabilities or health conditions.

This exemption could be relevant to certain PCN activities, particularly those delivered by roles like Social Prescribing Link Workers.¹⁷ A GP practice itself is likely to qualify as a state-regulated private welfare institution.²⁶ Therefore, if a practice directly provides welfare-type services (like social prescribing), these could be exempt under this provision.

However, the situation is less clear if these services are provided by a GP Federation or a separate PCN company. Whether such entities qualify as 'state-regulated' for the purposes of this exemption depends on their specific regulatory status and the nature of the services provided.²⁶ If the provider does not meet the criteria, the welfare exemption may not apply. As noted previously, if social prescribing services are supplied separately and not by a qualifying institution, direct supervision by a registered health professional might be required to potentially bring them under the medical exemption umbrella.¹⁷

The potential overlap and distinct requirements of the medical and welfare exemptions highlight the need for careful consideration of who provides the service, how it is supervised, and how the provider entity is regulated. A service like social prescribing might qualify under the welfare exemption if provided by a qualifying entity (like a practice), or potentially under the medical exemption if appropriately supervised by a clinician, demonstrating the nuances involved in applying these reliefs within PCN structures.

5.3 Cost Sharing Exemption (Recap)

As discussed in Section 4.4, this is a specific, targeted exemption designed for groups of organisations with exempt/non-business activities that form a separate entity (CSG) to provide services to themselves at cost.²⁵ It is a key potential solution for mitigating VAT on shared services like staffing within a PCN, but subject to strict and complex conditions.

5.4 Zero-Rating (Brief Mention)

Zero-rating primarily applies to the dispensing of qualifying drugs and medicines to patients for their personal use, based on a prescription from an appropriate practitioner and dispensed by a registered pharmacist or other authorised person.¹² While crucial for dispensing practices, it is generally less relevant to the VAT complexities arising from the collaborative service and staffing arrangements within PCNs, unless the PCN structure involves dispensing activities. The temporary zero-rating for certain PGD supplies until March 2027 is a specific point to note for relevant practices.²¹

6. Conclusion: Navigating the VAT Maze

Summary of Findings

The transition towards collaborative working through PCNs and GP Federations in England, while offering significant clinical and operational benefits, introduces considerable VAT risks that are often overlooked. The core issue is that standard VAT principles, designed for traditional business structures, do not neatly align with the inter-entity transactions inherent in network models. Activities fundamental to PCN operation, such as the sharing of staff across practices and the provision of management or administrative support by one entity to others, are frequently classified by HMRC as standard-rated taxable supplies, rather than falling under the VAT exemption for medical care.

Complexity Reinforcement

Navigating this VAT landscape is exceptionally complex for PCN leaders and practice managers. Existing VAT legislation and HMRC guidance, particularly VAT Notice 701/57, were not drafted with the specific nuances of PCN structures in mind.² This lack of tailored guidance creates ambiguity and forces reliance on interpretations of general principles and case law, which may not perfectly fit the PCN context. Compounding this challenge is HMRC's consistently narrow interpretation of the medical services exemption.⁵ The potential for significant financial loss through irrecoverable VAT, alongside the administrative burden of compliance (especially under partial exemption rules), makes VAT a critical strategic issue for PCNs and Federations.

Mitigation Requires Planning

While strategies exist to mitigate VAT exposure – including joint employment contracts, careful management of taxable supplies below the registration threshold, structuring arrangements via Federations as service providers, or establishing formal Cost Sharing Groups – none offer a simple, universally applicable solution.¹ Each approach involves trade-offs between VAT efficiency, administrative complexity, legal liability, operational control, and cost.¹ Effective mitigation demands proactive and informed planning from the outset, supported by robust, VAT-aware legal agreements and diligent ongoing operational and financial management.

The Critical Need for Tailored Specialist Advice

Given the complexities, ambiguities, and high financial stakes involved, obtaining specialist professional advice is paramount. Standard accountancy or legal advice is unlikely to suffice. PCNs and Federations must engage with advisors – typically specialist medical accountants or healthcare lawyers – who possess deep, demonstrable expertise in UK VAT law as it applies specifically to the healthcare sector and, crucially, to the evolving structures of PCNs and Federations.¹ These specialists can review the specific network agreement, operational arrangements, employment contracts, and financial flows to provide tailored guidance on the correct VAT position and help implement the most appropriate and compliant mitigation strategy. Investing in such advice is essential to avoid potentially costly errors, HMRC penalties ⁵, and the diversion of vital funds away from patient care.

Appendix: Key Resources

Practices, PCNs, and Federations seeking further information should consult the following official guidance and consider seeking advice from specialist professional firms.

HM Revenue & Customs (HMRC) Guidance:

• VAT Notice 701/57: Health professionals and pharmaceutical products: Provides core guidance on the VAT treatment of medical services, including the exemption criteria and supplies of staff. (Available on GOV.UK) ¹²

• VAT Notice 701/2: Welfare services and goods: Details the exemption for welfare services provided by qualifying organisations. (Available on GOV.UK) ³⁶

• VAT Notice 700: The VAT Guide: General guide to the principles of VAT in the UK. (Available on GOV.UK) ⁹

• HMRC VAT Cost Sharing Exemption Manual (VCOST): Detailed internal manual on the conditions and application of the Cost Sharing Exemption. (Available on GOV.UK) ³⁹

• HMRC VAT Health Manual (VATHLT): Internal manual covering healthcare exemptions. (Available on GOV.UK) ¹⁵

• HMRC VAT Finance Manual (VATFIN): Internal manual covering financial services, including fund management (relevant if considering pooled fund structures beyond simple 'on trust'). (Available on GOV.UK) ⁴⁹

NHS England Guidance:

• NHS England has previously issued informational notes regarding VAT and the Network Contract DES (e.g.¹⁷). However, these should be treated with caution as they may represent NHS England's interpretation and may not be fully aligned with or agreed by HMRC.¹⁷ Always cross-reference with official HMRC guidance and seek independent advice.

Disclaimer: This report provides general information based on publicly available guidance and expert commentary as of the date of compilation. It does not constitute specific tax or legal advice. VAT legislation and HMRC interpretation can change. All PCNs and Federations should seek tailored advice from qualified specialist professionals based on their specific circumstances.

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