HMRC have concluded their review of the VAT liability of certain medical services following a consultation process and have issued Revenue & Customs Brief 06/07 detailing changes to the medical exemption.  These will come into place on 1 May 2007.

The VAT changes are likely to impact mostly upon certain commercial, non-NHS activities undertaken by GP practices, doctors and consultants as providers of affected services and; insurance companies, the legal profession, employers and the public sector as recipients of the affected services.

The statutory healthcare activities undertaken by NHS Trusts and PCTs are not affected by the new rules; these remain outside the scope of VAT.  Statutory supplies of medical records also remain outside the scope of VAT.

Non-NHS medical services by NHS organisations are however potentially affected.  If the principal purpose of the medical service is the protection, maintenance or restoration of the health of an individual then the services will continue to be exempt from VAT.

Medical services which are primarily for the purposes of enabling a third party to decide a course of action will be subject to VAT.  This appears to affect mainly items such as witness/testimony reports, medicals for certain fitness certificates and some occupational health services.

If you undertake these types of activities and require assistance in determining the correct VAT liability in light of the new rules, please contact us.

Increasingly, NHS organisations are entering into arrangements with third-party suppliers to make facilities available to those suppliers to carry out private health services from NHS premises.

The assumption seems to be that no VAT is due on income received by the NHS for supplying facilities, however when examined in more detail, these may include a mixture of supplies which may be subject to VAT.  Examples include licenses to occupy land/premises (exempt provided there has been no option to tax), staff or ‘services’ of staff (potentially standard-rated) and other ancillary supplies (utilities, cleaning, catering, consumables) which may be exempt or standard-rated depending upon the specific circumstances.  This potential VAT headache is complicated further when the facilities are provided in return for a ‘profit share’, which is not clearly defined and could potentially be fully taxable.

If you are entering into such arrangements, please contact us at the earliest opportunity to determine the correct VAT liability.

Some VAT advisers continue to be promoting retrospective business claims going back further than three-years following various judgements that some aspects of the implementation of the three-year cap (now over ten years ago), was unlawful.

Although this may be relevant to some NHS organisations, any retrospective claims are limited to the current VAT registration of the NHS entity and claims must be based upon accurate, comprehensive records.  Scope for VAT refunds beyond three years are therefore quite limited and the values are probably not worth pursuing in the majority of instances.

Currently, some employment bereaux (typically referred to as agencies) which provide staff to the NHS act as ‘principals’, charging VAT on the whole supply, whereas others act as ‘agents’, only charging VAT on the commission element.

As stated above, VAT on nursing and admin staff is generally considered recoverable in either case, however bereaux which act as principals for the supply of doctors/locums create a higher VAT cost to their NHS clients in light of HMRC’s rules.

We have recently become aware that HMRC are now challenging the ‘agency’ treatment of some employment bereaux providing doctors/locums, stating that they should be accounting for VAT on the whole supply.  This dispute is due to be heard in the VAT Tribunal.

If HMRC succeed, it could mean that all doctors/locums bereaux will be forced to account for VAT on the whole of their supply, further burdening the NHS with non-recoverable VAT.  We will keep you posted with developments.

HMRC issued ‘new’ guidance last April regarding VAT recovery on agency fees.  We included this guidance in a VAT update which was sent to all of our clients.

The guidance stated that VAT on agency commission fees for nurses can be recovered under COS heading 41 and VAT on agency fees for secretarial, telephone and clerical staff, IT staff, etc can continue to be recovered under COS heading 69.  Accounting services can continue to be recovered under COS heading 1.

VAT on pure staff secondments and agency fees for medical staff other than nurses cannot however be recovered under any COS heading.  This is generally doctors/locum services but also relates to other medical staff such as radiologists, pharmacists, pathologists, etc.

Up until this guidance was issued, NHS organisations had always recovered the VAT on all agency staff irrespective of whether they were nurses or doctors, with the full knowledge of HMRC.

We would like to reiterate our advice to any Trust that has misunderstood the guidance or where it has not been disseminated to accounts payable staff to cease recovering the VAT on doctors/locum agency fees.

Following consultation with the DoH and HM Treasury, Customs have now published revised guidance on the scope for VAT recovery under these two headings.

This follows uncertainty about whether VAT can or cannot be recovered where property related supplies are involved.

Heading 45

Heading 45 is for the operation of hospitals, healthcare establishments and healthcare facilities and the provision of any related services.

Customs have now clarified that if these types of facilities are provided under a PFI or LIFT arrangement, VAT will be recoverable irrespective of the level of associated services, i.e., PFI or LIFT arrangements which are similar to a ‘bare’ commercial lease will be eligible for VAT recovery.

If however, the facilities are provided under arrangements which are not strictly PFI or LIFT, then they must include a full package of services necessary for the ‘operation’ of the facility for VAT to be recovered. This should be the core services of cleaning, maintenance, security, etc.

If there is a minimal level of services, no VAT will be recoverable unless the services are separate from the lease, in which case VAT can be recovered on the services only and not the lease.

Heading 53

Heading 53 is for the provision under a PFI agreement of accommodation for office or other governmental use, together with management or other services in connection with that accommodation.

In the past Customs have generally allowed VAT recovery on leased accommodation which is ‘similar’ to a PFI arrangement. In this context, ‘similar’ was taken to mean serviced or managed accommodation.

In the latest guidance, Customs now state that VAT is recoverable under heading 53 only on PFI arrangements with a lease of serviced or managed accommodation. VAT is not recoverable under heading 53 on PFI arrangements with no services nor is it recoverable on non-PFI arrangements, unless the services are separate from the lease, in which case VAT can be recovered on the services only and not the lease.

Transitional Period

If an NHS body has been recovering VAT on an existing agreement without Customs’ approval and the agreement does not meet the above criteria, continued VAT recovery will be allowed until 31 March 2006.

If however you have been recovering VAT on an existing agreement which does meet the above criteria, VAT can be recovered until the end of the lease.

Finally, VAT recovery on any pending or proposed contracts will only be allowed if they meet the above criteria.

Customs have published a Business Brief (13/05 note 4) relating to the VAT Tribunal’s decision in the case of University Court of the University of Glasgow.

In this case, the Tribunal considered whether arrangements for the University to provide medically-registered staff to work at NHS Trusts was a supply of staff (taxable at the standard-rate) or a supply of medical care (exempt from VAT). On the balance of the facts, the Tribunal concluded that the supplies in question were taxable supplies of staff.

This case does not establish any new principles of VAT law in that pure supplies of staff which come under the direction of the party receiving the supply are always taxable no matter what duties they perform. Where an employer provides the ‘services’ of its staff, the VAT liability follows the nature of the services, e.g. exempt medical services or standard-rated accounting or admin services, etc.

The crucial issue for the NHS is that Customs went on to confirm in their Business Brief that VAT incurred on supplies of staff cannot generally be recovered under the Contracted-out services direction.

VAT recovery under the contracted-out services direction is only allowed on the ‘services’ of staff (e.g. typing, secretarial, admin, accounting, nursing, etc) and not the pure supplies of staff.

It would therefore be prudent to review the contractual arrangements for supplies of medical or non-medical staff (e.g. secondments), to see whether VAT will now be due in light of this decision and whether it is eligible for recovery. It would also be prudent to review supplies made by the NHS to consider whether output tax should be charged.

Following a recent ECJ ruling, NHS bodies may now have the opportunity to recover a higher proportion of VAT at the outset on capital schemes which have a mixture of business and non-business use.

The decision which has been accepted by Customs allows a VAT registered body which has both business and non-business activities to reclaim all the VAT ‘up front’ where some business use is made and then account for VAT on the non-business use of the asset over the economic lifecycle (as opposed to apportioning the VAT incurred between business and non-business use). This is known as the ‘Lennartz’ principle.

Customs have announced in Business Brief 15/05 that they would require the output tax charged under the Lennartz principle to be calculated over a maximum 20 year period based on straight line depreciation.

The scope for VAT recovery applies to schemes commenced from the date of Customs’ Business Brief (9 August 2005). There may also be additional scope to retrospectively claim VAT on schemes commenced since 9 April 2003 provided the claim is made by 9 February 2006.

Customs & Excise have recently announced that placing direct advertisements in newspapers, magazines, etc. is not eligible for VAT recovery under the contracted-out services rules. Although Customs insist that this is simply clarification of existing rules, it will be news to most NHS organisations that have always recovered VAT on these services.

Customs have however stated that the provision of advertising is still eligible for recovery under item 57 of the COS headings if provided as part of a package of services by a third party.

To clarify, we have confirmed with Customs that using the services of an advertising agency does still qualify for VAT recovery.

Since December 2002, heading 53 of the contracted-out services list has stated that VAT is recoverable on the ‘provision under a PFI agreement of accommodation for office or other governmental use, together with management or other services in connection with that accommodation’.

Customs NHS policy unit are however still considering the circumstances under which NHS organisations can recover VAT on leased accommodation.

Since this heading came into force, it is our understanding that VAT on leased accommodation which is ‘similar’ to a PFI agreement is also recoverable. In this context, similar to a PFI agreement means that NHS organisations simply occupy accommodation and all the services relating to the building are provided by the ‘landlord’ under a single supply agreement.

Customs’ Business Brief 18/03 published in September 2003 describes ‘Composite Trade’ and ‘LIFT’ arrangements as being PFI arrangements which are eligible for VAT recovery subject to the usual conditions. This is on the basis that these are also ‘similar’ to PFI.

This wider interpretation of heading 53 is still being reviewed by Customs NHS policy branch and there is likely to be further clarification and guidance in the future. In the meantime, if your NHS organisation is occupying or is intended to occupy leased accommodation, there may be scope for VAT recovery. There is however no blanket approval to recover VAT on leased accommodation either as part of PFI, LIFT, Composite Trade or otherwise. We would therefore ask that you seek our advice before any VAT is recovered.