Customs will shortly be issuing further guidance regarding the attribution of costs when calculating VAT recovery on business activities. This is following concerns that direct attribution is only being done to a limited extent which possibly results in over recovery of VAT which relates wholly to non-business healthcare activities.
We have therefore been working very closely with Customs recently in order to ensure that our working methods for business and partial exemption reviews are acceptable. As such, we have developed a range of improved analysis techniques which aim to maximise direct and indirect input tax recovery and minimise partial exemption exposure and at the same time are considered ‘fair & reasonable’ by Customs.
This does however mean that we ask our clients for a bit more information than before to complete these reviews, however we can demonstrate the value of this by identifying more accurate VAT savings which are agreed by Customs. Furthermore, we continue to carry out ‘re-reviews’ of business and partial exemption where a review has already been carried out by previous VAT advisers and to-date we have identified in excess of £1.25M of additional savings. Proof that not all VAT advisers are the same!
Under current published guidelines, VAT recovery percentages calculated on capital schemes below £500K in value (excluding VAT) do not need Customs’ prior approval, however sufficient evidence and working papers must be kept available to justify VAT recovery should Customs require this.
Also at present, the ‘banding options’ can be used for schemes up to £15m in value before prior approval is required, (although the bandings are generally thought to be less advantageous in most cases). Any VAT recovery on capital schemes sought outside of these guidelines requires prior agreement.
Customs will soon be publishing revised guidance, believed to come into effect from April 2005, whereby Trusts will be required to seek prior approval to recover VAT on any capital scheme where the potential VAT recovery is likely to exceed £50,000. This is irrespective of whether the banding option is used, or whether the VAT recovery is based upon a detailed review of costs. Furthermore, Customs will be generally ‘tightening up’ VAT recovery on schemes. For example, where VAT recovery is sought based upon a review of costs, more detail will be required on larger items such as mechanical costs.
These rules apply equally where Trusts determine VAT recovery themselves or where they appoint the services of VAT advisers.
The general rules on VAT recovery also apply stringently to schemes reviewed under the ‘free’ Procure21 service, where no ‘special arrangements’ or advantageous terms have been agreed with Customs.
With effect from 1 August 2004, legislation has been introduced to require VAT registered traders to notify Customs if they use schemes that Customs deem to be ‘VAT Avoidance’.
The legislation is intended to dissuade the creation and use of ‘contrived’ and elaborate schemes, whose main purpose is to avoid tax. The requirement to notify Customs will provide them with information in order to take counter action where appropriate.
There are two types of areas that Customs are targeting, these are ‘Designated avoidance schemes’ and ‘Hallmark schemes’. Customs have published a list of 8 designated schemes the use of which must be disclosed to Customs. A hallmark scheme is basically a transaction or number of transactions entered into which has, as one of its main purposes the intention to achieve a tax advantage.
Customs have also published the hallmarks of such schemes.
There are heavy penalties for traders who fail to notify Customs when they use such schemes, however as with other VAT penalties, these cannot currently be directly levied on NHS bodies. Trusts should however still be aware that certain transactions with non-NHS third parties may still come under scrutiny. It should also be pointed out that NHS bodies have in the past been specifically warned against using avoidance schemes by the DoH and HM Treasury.
Finally, the legislation is NOT intended to dissuade traders or NHS bodies from reviewing bona-fide transactions in order to ensure that you gain the correct tax advantage, (e.g. PFI arrangements, property transactions, business reviews, COS reviews, etc).
If you would like more detailed information on the legislation or are in any doubt about arrangements entered into or being suggested for your NHS organisation, please let us know at the earliest opportunity.
Customs currently allow NHS bodies to complete a partial exemption calculation annually in conjunction with a business activity claim. This is a concession, as the normal legal requirement is that the calculation is completed for each monthly VAT period, with an annual adjustment made at the end of the year.
It has been Customs’ policy in recent years not to accept annual business claims without a partial exemption calculation also being completed.
Even if Trusts choose not to submit a business activities claim, there is still a statutory requirement to carry out the partial exemption calculations to ensure that trusts meet their legal requirements regarding Partial exemption.
We wish to remind our clients and other NHS Trusts that when we calculate annual business claims, we also complete a FREE separate partial exemption calculation as part of this exercise to ensure that you meet your statutory obligations and to ensure that your partial exemption VAT liability is minimized.
Transactions involving land and property are often complex and the VAT liabilities can vary. Generally, the supply of land and property is exempt from VAT however certain supplies may be standard-rated, zero-rated or even outside the scope of VAT depending upon the circumstances.
When disposing of land and property such as surplus hospital land or staff accommodation, the NHS must apply the correct VAT liabilities in the same way as everyone else. Professional advice should therefore always be sought at the earliest opportunity in order to ensure transactions are treated correctly for VAT purposes and you don’t incur unnecessary costs.
For several years now Customs have enforced an annual 30 June deadline for VAT recovery on Contracted out services on the basis that Treasury funding for the NHS and other Government departments is designed to take account of VAT paid or recovered on an annual basis. Any deviation from this would therefore in theory distort the Treasury’s figures.
Last year, over 200 NHS bodies’ submitted a VAT return to Customs which included a 2002/03 claim but was received after 30th June 2003. HM Revenue & Customs at first refused to pay these claims however following discussions within Customs and Treasury and also considering representations from Department of Health, it was agreed that those NHS bodies that were informed they had missed the deadline for 2002/03 were permitted to recover the VAT that they were advised to repay.
Customs have now re-iterated that the 30 June deadline for 2003/04 is to be treated as an absolute deadline with no exceptions and they reserve the right to turn down claims for 2003/04 received in Southend after the deadline.
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. The following guidance aims to clarify the VAT recovery treatment under the contracted-out services rules.
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 clearly differentiates on the invoice between the goods element and any service element of modifications and/or adaptations, Customs allow VAT recovery on the services element under contracted-out services item 52, ‘Professional services, 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 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.’.
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. Up until 30 March 2003, these were being treated as standard-rated by most suppliers and as such, VAT was eligible for recovery under contracted-out services item 52, ‘Professional services, etc.’
Customs currently allow NHS bodies to complete a Partial Exemption calculation annually in conjunction with a business activity claim. This is a concession, as the legal requirement is that the calculation is completed for each monthly VAT period, with an annual adjustment made at the end of the year.
It has been Customs’ policy in recent years not to accept annual business claims without a partial exemption calculation also being completed.
Even if Trusts choose not to submit a business activities claim, there is still a statutory requirement to carry out the partial exemption calculations to ensure that trusts meet their legal requirements regarding Partial exemption.
We wish to remind our clients and other NHS Trusts that when we calculate annual business claims on behalf of our clients, we also complete a separate partial exemption calculation as part of this exercise to ensure that you meet your statutory obligations.
Some of our clients have asked us recently about the VAT treatment of land & property sales, e.g. disposal of surplus hospital sites. Transactions involving land and property are often complex and the VAT liabilities can vary. Generally, the supply of land and property is exempt from VAT unless specifically excluded from exemption. Such supplies may therefore be standard-rated or zero-rated depending upon the circumstances.
When disposing of land and property or granting other interests (e.g. leases, rents, licences, etc), the NHS must apply the correct VAT liabilities in the same way as everyone else. Professional advice should be sought in each particular case and we would therefore be happy to help in these circumstances.
We would like to draw your attention to a potential opportunity for your NHS organisation to benefit from additional retrospective VAT refunds.
The table below represents a small selection of VAT review exercises that CRS VAT Consulting have recently carried out. In each and every case, a review had already been completed by previous VAT consultants but we identified ADDITIONAL VAT SAVINGS over and above those previously recovered.
| NHS Organisation’s Annual Turnover |
Previous VAT Claim | Additional Claim Approved by Customs |
Percentage Increase |
| £92m | £14,875 | £28,770 | 193% |
| £62m | £72,565 | £12,599 | 17% |
| £65m | £1,730 | £108,680 | 6282% |
| £71m | £52,710 | £72,842 | 138% |
We are able to identify these additional savings because of our specialist NHS knowledge, innovative VAT solutions and attention to detail in areas often overlooked. All of these additional claims have been approved by Customs and we can provide references from our clients if required.