The government has issued a warning to hospital trusts that use short-term contracts to avoid paying tax.

Chief secretary to the Treasury Danny Alexander has reportedly penned a letter to the Recruitment and Employers Confederation stating that trusts should either employ temporary locum doctors like normal staff or pay VAT on the cost of hiring them.

Up to 30 trusts in England are thought to be using new forms of short-term contracts on which tax is not payable. These are used instead of the traditional agency model, which sees locum agencies charge the hospital a fee plus VAT.

ITV News reports that the schemes have been developed by accountancy firms for the purpose of avoiding tax. Some doctors are reportedly hired for only one shift at a time, with some having up to 200 P45s.

HMRC has promised to investigate the trusts using the system, but Mr Alexander appears to believe that the practice of using very short-term contracts should be stamped out altogether.

In the letter seen by ITV News he wrote: “The issue here is whether NHS trusts employ people, and assume the related costs, risk and responsibilities, or whether they make use of agency staff and incur VAT.”

Mr Alexander said no VAT is due in cases where evidence confirms that staff are directly employed by trusts on short-term contracts, with the trusts taking on the liabilities of an employer.

He added: “The evidence will include the length of time that the person is engaged for, for example, HMRC would not consider a placement for a period of one shift to be consistent with a contract of employment, but instead, would see that as indicating the agency is making a supply of staff liable to VAT.”