In our January VAT update, we wrote about the House of Lords judgement in the cases Conde Nast and Fleming, which obliged HMRC to now repay VAT refunds accrued but not claimed for periods before 1996 right the way back to when VAT was introduced in 1973.

HMRC have since confirmed that this relates to underclaimed input tax and overpaid output tax. This represents a real opportunity for NHS organisations to submit claims in areas such as private patient drugs (input tax) or cold take-away food (output tax) for these periods.

Claims must be made by 1 March 2009 however at present, HMRC are withholding such claims by the NHS until further guidance is obtained by the Policy Branch.  We are currently in the process of formulating and submitting claims of behalf of our clients and would urge other NHS organisations to contact us at the earliest opportunity to discuss potential claims.

The House of Lords has delivered its judgement on the legality of the three-year cap on VAT refunds.

The Conde Nast and Fleming judgement states that when the three-year time limit for VAT claims was introduced back in 1996, HMRC should have allowed an adequate transitional period for retrospective refunds to be made.  Furthermore, the retroactive transitional period announced by way of business briefs a few years later has now been judged unacceptable.

This landmark decision means that VAT refunds accrued but not claimed for periods before 1996 right the way back to when VAT was introduced in 1973 are now repayable.  HMRC are likely to act quickly to introduce an adequate transitional period for claims to be submitted.  This makes it important for claims to be considered at the earliest opportunity.

Potential for the NHS

This issue represents a real opportunity for NHS organisations to submit claims in relation to business activities, where previous claims were either not made or were stopped by HMRC due to the cap.  This is likely to be more relevant for Trusts which have the same VAT registration number now as they had prior to 4 December 1996.  This will be the case for many Trusts that were originally formed in the early 1990s.  Contracted-out service VAT claims would not be valid as these form part of Government funding and subject to an annual cut-off.

VAT refunds for earlier periods are likely to be more difficult to prove due to lack of adequate records, restructuring of NHS entities, changes in VAT registrations, etc.

We would therefore urge NHS organisations to contact us at the earliest opportunity to discuss potential claims.  HMRC are yet to respond to the judgement, but we will inform you of their response as soon as this becomes available.

In our last newsletter, we provided definitive guidance agreed with HMRC regarding VAT recovery on agency staff.

In particular, HMRC had ruled that VAT on nursing services and nursing staff either provided by a nursing principal or nursing agency could be recovered under COS heading 41 provided the nurses were ‘qualified’ nursing grades, i.e., grades D to I or band 5 and above.

HMRC have since confirmed that the Policy Team is now formally reviewing heading 41with a view to determining (once & for all) what staff fall within this heading.

They have agreed exceptionally, while the review is in progress that NHS bodies may continue to recover VAT on nurses, nursing auxiliaries, and nursing/healthcare assistants.

This represents a slight widening of the previous ruling in that VAT recovery can be extended to non-qualified nurses/healthcare assistants as well as qualified nursing grades.

If NHS bodies have previously restricted recovery or had VAT disallowed by HMRC for these services, you may recover the restricted VAT on the next appropriate VAT return.

This information was provided to us in advance of HMRC’s next NHS newsletter due in February /March 2008 which will confirm the latest position regarding this heading.

NHS bodies have historically recovered VAT on all agency staff with the full knowledge of HMRC, however as outlined in our previous news bulletins, they have endeavoured over the last few years to clarify and also restrict the COS headings relating to these types of supplies.

There is often confusion as to whether NHS bodies are being provided with ‘agency staff’ or ‘services’ and therefore whether the VAT on certain supplies can be recovered under the COS rules.

For the avoidance of doubt and to also correct misleading advice which you may have received from elsewhere, we have also obtained definitive guidance from HMRC on this matter and can confirm that the following is correct:

  • VAT on nursing services and nursing staff either provided by a nursing principal or nursing agency can be recovered under COS heading 41. This includes all qualified nursing staff grades.
  • VAT cannot be recovered under any COS heading on the services of any other non-nursing healthcare workers or other non-nursing healthcare staff provided by an agency, such as doctors/locums/consultants, social workers, physiotherapists, laboratory or theatre technicians, radiographers, etc.
  • VAT on office staff can generally be recovered under COS heading 69. This has not changed, the wording of the COS heading ‘including agency staff’ has been incorrectly interpreted in the past to mean all agency staff.  HMRC have confirmed that this is somewhat misleading and should only really include office staff.  The heading includes typists, secretaries, telephonists, clerical admin staff, accounts staff such as accounts payable, credit control staff, etc, IT staff such as data inputting, data analysis, uploading PC programs, etc (basically general day-to-day admin, clerical, accounts and IT office duties).  If an employment agency provides senior accountancy staff or senior IT consulting staff, this is not eligible under any COS heading.
  • VAT cannot be recovered under any COS heading on supplies of any other agency staff. Services such as catering, laboratory, laundry, library, messengers, porters, collection, delivery, passenger transport, pest control, security, etc. continue to be eligible under the various headings as contracted-out services in their own right, agency staff carrying out these functions are not eligible for recovery.
  • VAT on accountancy services such as record keeping, book keeping, financial control, credit control, preparation of financial accounts, accountancy advice, internal audit, etc can be recovered under COS heading 1. This does not include agency staff.
  • VAT on IT consultancy services can continue to be recovered under COS heading 52. If an agency provides IT consultancy staff, HMRC have recently clarified that this is not eligible for VAT recovery.
  • Services of managers, advisers, experts, specialists, consultants, etc can continue to be recovered under COS heading 52. This is generally accepted to mean where a company or other form of trading body such as a sole proprietor, partnerships, LLP, etc, provides their services.    This includes services of solicitors, architects, quantity surveyors, other professional advisers, etc.  Again, it does not include agency staff.

HM Treasury have completed their review of the COS headings and a revised direction will be issued in the very near future.  We shall publish the revised list applicable to the NHS as soon as this becomes available.  In the meantime, HMRC have given early notification to a couple of changes which will have retrospective effect back to 1 April 2006.

COS Heading 14

Due to constant changes in IT, it has been recognised that the types of IT services purchased are becoming increasingly removed from the IT services once performed in house.

The revised direction therefore replaces:

Computer services supplied to the specification of the recipient, including the provision of a fully managed and serviced computer infrastructure

with:

Computer services supplied to the specification of the recipient including:

  • the provision by one or more suppliers of a fully managed and serviced computer infrastructure either using the recipients’ own hardware or hardware provided by the supplier as part of the infrastructure; and
  • the development, delivery and support of bespoke software.

Excluding:

  • supply and support of off-the-shelf software;
  • hire of hardware alone;
  • line rental alone;
  • telephony; and
  • hire of computer consultants to add expertise to in-house IT teams.

It is hoped that this new wording makes more explicit what services and procurement arrangements are covered and the sort of services that are not.

COS Heading 37

The actual wording of the heading remains the same; ‘Maintenance, repair and cleaning of equipment, plant, vehicles and vessels;.’  HM Treasury has additionally confirmed that recovery of VAT under can be extended to equipment, plant, vehicles and vessels leased from a separate supplier to the one providing the maintenance. Recovery on this basis can be made with effect from 1st April 2006. Previously recovery was restricted to equipment, plant, vehicles and vessels owned by a department.

As outlined in our previous newsletters, there are changes to the VAT liability of certain medical services which came into place on 1 May 2007.  These affect NHS Trusts that generate non-NHS medical income from activities such as clinical trials or occupational health services.

An example is ‘post-mortem examinations and reports’ provided to coroners, which are now fully taxable.

The changes from 1 May represent a timely opportunity to correctly determine the VAT liability of all non-NHS income.

We can conduct a systematic review of all income generation streams, both debtor and cash in order to determine the correct VAT treatment.  Our work would involve talking to the relevant staff at the Trust to gain a good understanding of your income streams and reviewing a given list of financial reports, contracts, sales invoices and other supporting documentation which we would ask you to produce.

The results of this review would then be used to produce a tailored report to be used to determine the correct VAT liability to be applied to your income streams.  This can then be referred to by your staff on a regular basis to ensure that VAT is accounted for correctly on all income.

Please contact us if you are interested in having a review carried out.

We have recently had re-confirmation from HMRC of the current COS VAT recovery rules applicable patient appliances.

The term ‘patient appliances’ refers to items worn by patients such as footwear, callipers, wigs, etc and also applies to aids such as wheelchairs and walking frames.

Custom Made Items

The supply of bespoke surgical footwear or of a wheelchair or other appliance specifically designed for a particular patient is not eligible for VAT recovery as the supply is primarily of goods.

If however, the manufacturer differentiates on the invoice between the goods element and the services element of modifications and adaptations, VAT can be recovered on the services element under COS heading 37, ‘Maintenance, repair and cleaning of equipment, etc.’

Examples of modifications are:

  • Raising a sole or heel
  • Fitting bespoke straps/supports/callipers

In these circumstances, VAT can be recovered on the parts and spares elements which form a part of the service.  VAT cannot however be recovered on the main supply of the goods, (e.g. the ‘base’ shoes).

Ready Made Items

The supply of ready-made patient appliances such as standard wheelchairs or boots of various sizes is not eligible for VAT recovery as these are treated as goods only.

Maintenance & Repair

Repair services such as re-heeling or re-soling is eligible for VAT recovery under item 37, ‘Maintenance, repair and cleaning of equipment, etc.’, together with the integral goods such as the replacement soles/heels.

Orthotist/Prosthetist Session Fees

These services are exempt from VAT under item 1c, group 7, schedule 9, VAT Act 1994, therefore the suppliers should not be charging VAT on their invoices.

A ‘Memorandum of Understanding’ relating to joint staff of universities and NHS organisations has been agreed with The Department of Health, NHS Employers and the Universities and Colleges Employers Association in response to the University of Glasgow – v- HM Revenue and Customs VAT tribunal ruling.

In the University of Glasgow case released in April 2005, the VAT Tribunal concluded that there was a supply of staff from the university to the NHS which was subject to VAT. Furthermore, this VAT was not eligible for recovery by the NHS under the contracted-out services rules.

The purpose of this new memorandum is to set out the NHS and university understanding of the role of joint staff of NHS organisations and universities who are engaged in both teaching and/or research as well as the delivery of patient care.

HMRC have agreed that provided the parties operate within the context of the practices described in the Memorandum, such arrangements will be outside the scope of VAT.

As outlined in our February 2007 newsletter, there are changes to the VAT liability of certain medical services which are due to come into place on 1 May 2007.  These will affect NHS Trusts that generate non-NHS medical income from activities such as clinical trials or occupational health services.

In our experience, Trusts usually get the liability right for ‘core’ income such as staff & visitor catering, car-parking or drug sales.  Most NHS Trusts do however enter into a broad range of income generation areas where the VAT treatment may not always be considered.

The changes from 1 May represent a timely opportunity to correctly determine the VAT liability of all non-NHS income.

Getting it wrong can represent a nasty surprise if HMRC carry out an assurance visit and find that VAT has not been accounted for on certain income, potentially going back three years. Getting the liability right can however increase the potential for direct and indirect input tax recovery.

Our Review Service

We can conduct a systematic review of all income generation streams, both debtor and cash in order to determine the correct VAT treatment.  Our work would involve talking to the relevant staff at the Trust to gain a good understanding of your income streams and reviewing a given list of financial reports, contracts, sales invoices and other supporting documentation which we would ask you to produce.

The results of this review would then be used to produce a tailored report including tables and flowcharts to be used to determine the correct VAT liability to be applied to your income streams.

This can then be referred to by your staff on a regular basis to ensure that VAT is accounted for correctly on all income.

Please contact us if you are interested in having a review carried out.

The list of eligible contracted-out services published in December 2002 is currently being reviewed by HM Treasury.  No conclusions from the review have yet been published but we understand that VAT recovery in relation to professional services is due to be changed.

The perception is that the current heading 52 on the list relating to professional services is too widely drawn, resulting in NHS organisations recovering VAT on a range of services not originally intended by Treasury.  The recent ‘clarification’ regarding VAT recovery on doctors/locums fees is an example of this.

The changes will no doubt be designed to clarify the heading further which will have the effect of limiting the scope for VAT recovery.

We will provide a further update on this once the results of the review have been announced.