Leading the NHS through Direct Engagement evolution

As HMRC prepares to reshape the VAT landscape for medical locums, Liaison Workforce has been here before – and we know what comes next.

When Direct Engagement (DE) was first introduced to the NHS by Liaison Workforce, it was genuinely new territory. NHS trusts, agencies, and locums alike faced uncertainty – new processes, new responsibilities, and new questions about tax, pensions, and compliance. Liaison Workforce was there at the beginning, helping NHS providers navigate an unfamiliar landscape and build the infrastructure that made DE work.

Years on, DE is now a cornerstone of flexible medical workforce strategy across the NHS, not just facilitating employment, but providing a total managed solution for workforce, including grip and control for rates. And yet, it is evolving again. The Isle of Wight tribunal, the awaiting HMRC briefing on future VAT treatment, and incoming umbrella legislation are creating a new moment of uncertainty… one that looks, in many ways, remarkably familiar.

We’ve been here before. And our position is the same as it has always been: don’t make permanent decisions in temporary uncertainty.

With HMRC yet to confirm the future VAT treatment of medical locums, their upcoming briefing could exempt locum supplies – or it could change legislation so that VAT applies, making Direct Engagement more valuable than ever.

Why this moment calls for expert guidance, not a retreat from DE

Our VAT colleagues have an unrivalled level of NHS VAT experience, and their assessment on this issue is clear: the outcome of the next HMRC briefing is uncertain, and either direction carries significant financial implications for NHS trusts.

If future locum supplies are confirmed as VAT-exempt and trusts have already dismantled their DE infrastructure, they face a disruptive and costly rebuild. If HMRC moves to legislate standard-rated VAT on non-DE locum supply, trusts without a DE provision in place could face an annual cost pressure running into hundreds of thousands of pounds.

Across our nearly 60 Direct Engagement clients, we are seeing a consistent picture: agencies have no intention of reverting to employed locum supply models until the briefing is issued. The reasons are structural, not tactical.

The agency and locum landscape is firmly behind DE

It is sometimes assumed that if VAT exemption returns to locum supply, agencies will simply revert to employing workers and billing the NHS as before. In practice, the agencies we work with across TempRE’s network tell a different story.

Taking back payroll responsibility means absorbing upfront cash flow burden before NHS invoices are settled. It means accepting partial exemption on VAT recovery; a significant operational cost. And new umbrella legislation means agencies become liable for unpaid income tax where locums operate via umbrella companies, giving them a powerful incentive to push locums toward Direct Engagement, where employment tax compliance sits with the locum and NHS directly.

For locums themselves, Direct Engagement means access to the NHS pension scheme, something neither agency employment nor umbrella arrangements can offer. With our NHS clients, on average, 59% of DE workers are enrolled in a pension scheme – and that is a meaningful benefit of care that is difficult to replace.

The risks of stepping back now

We understand that the VAT landscape has prompted trusts to reassess their DE arrangements. But the risks of exiting Direct Engagement, particularly before HMRC has issued its guidance, are substantial and concrete.

Beyond the potential VAT cost pressure, trusts face real clinical risk if agencies redirect locum supply toward NHS providers who retain a DE model. The operational burden of rebuilding manual booking, timesheet, and invoicing processes, and the loss of spend visibility and rate controls, represents both a financial and a governance step backward.

With the potential cost pressure of losing grip and control of locum spend that Liaison Workforce’s DE solution provides, NHS organisations should be aware that any move away from the solution could lead to the loss of real-time visibility of spend, accruals data, rate and timesheet control functionality – loosening grip and lessening control, and resulting in possible cost uplifts of 20% of spend.

Liaison Workforce’s Commercial Director, Jack Mazzina, says:

Direct Engagement was built with guidance, and it is evolving with guidance. Liaison Workforce’s role has always been to lead NHS trusts through that evolution making use of our changing technology and our extensive team of experts, not to leave them navigating it alone.