In our October 2013 newsletter, we reported that HMRC is undertaking an investigation in to a number of VAT schemes used by NHS Trusts, which involve the hire of locum doctors and other staff on short-term employment contracts that fall outside the scope of VAT.
HMRC’s Director-General for Business Tax, Jim Harra, has confirmed that this review is still in progress, but that by the end of the current financial year, HMRC will have ‘(tackled) cases that we believe are not operating VAT correctly’.
In his evidence before a recent hearing of Parliament’s Public Accounts Committee, Mr. Harra stated that HMRC has concerns about how these schemes work in practice, and that, where a locum becomes an employee of the NHS, it has to take on the responsibilities of an employer.
Responding to a question from the Committee’s Chair, Margaret Hodge, about one type of scheme, Mr. Harra noted that in some instances, employment contracts could last as little as a day. He went on to state that this was ‘clearly not how the scheme was described to us’, and that it was ‘not the basis on which we originally gave our view about its VAT treatment’. In light of this, HMRC would ‘reserve our right to challenge’ the VAT treatment being applied, following the conclusion of its investigation.
The transcript of the hearing is now available on the Public Accounts Committee website, and we would also be happy to provide a copy, if preferred. We will of course keep you updated as HMRC’s investigation progresses.
The HFMA has now published the minutes of the September 2013 meeting of its VAT technical sub-committee, attended by representatives of the VAT profession, HMRC and NHS Trusts.
No new VAT developments were announced, but the Committee did discuss several proposed changes to the NHS VAT rules, including the following;
- a ‘Framework’ agreement for the calculation of business activity and partial exemption VAT adjustments by NHS bodies;
- options for the VAT treatment of leased cars supplied to NHS employees (with the Committee preferring an option under which a 30% ‘block’ would be applied to VAT incurred on lease car costs, but no output VAT would be due on salary deductions);
- a four-year ‘cap’ for recovery of VAT incurred on contracted-out services (‘COS VAT’).
The four-year cap proposal is intended to address a perceived disparity in the VAT rules applying to local authorities and to the NHS. At present, HMRC can issue assessments for COS VAT which has been over-recovered within the previous four years, but NHS organisations have only until 7th July following the end of a financial year to recover COS VAT incurred in that year. The Treasury is presently considering the implementation of a four-year cap as part of a wider review of Section 41 of the VAT Act 1994, which applies to government departments and NHS bodies.
The VAT treatment of leased cars has been under review by HMRC for some time, and options were discussed by the Committee. HMRC will review any feedback received in response to these options before making a final decision on which one should be implemented.
Regarding the Framework agreement, work has also been taking place for some time within HMRC, and with NHS representatives and the HFMA, on identifying suitable methods for calculating business activity and partial exemption adjustments. The agreement will be discussed in further detail at the HFMA’s ‘Tax Matters’ seminar on 6th November 2013, at which the representatives from HMRC may be able to provide further guidance on how the agreement will be applied. Representatives from CRS VAT will also be in attendance, and we look forward to seeing you on the day.
Another recent development is the launch of a consultation exercise by the EU Commission on the future of EU VAT rules for public sector bodies and activities in the public interest. As part of this exercise, the Commission has published a consultation document which sets out what it sees as the main issues, namely;
- possible distortion of competition between public and private sector organisations, due to differential taxation;
- complexity and lack of harmonisation, for example, difficulties in determining which supplies are taxable, exempt or outside the scope of VAT, and the disparity of EU and domestic legal provisions regarding terms such as ‘public authority’ and ‘body governed by public law’.
NHS organisations are treated as ‘public bodies’ under UK VAT law, and the possible distortion of competition between public and private sector bodies in the healthcare sector has already been the subject of a report by NHS regulator ‘Monitor’, published in March 2013. The report highlighted the differential VAT treatment of NHS organisations and charities bidding to provide NHS services, and recommended that these charities should also be entitled to claim VAT rebates.
This recommendation is echoed in one of the Commission’s options for reform, which involves the setting-up of a refund system at EU level. This would refund input VAT in respect of non-business and VAT-exempt activities, for both public bodies and private organisations carrying out activities in the public interest.
Another reform option suggested by the Commission is the elimination of special rules for public bodies, so that activities would be taxed or exempted according to their nature, and not according to the status of the body carrying them on.
The consultation document lists a number of questions which the Commission has invited interested parties to respond to, e.g. how they evaluate the existing rules, and what feedback they have on the suggested reform options. The deadline for the submission of responses is 14th February 2014.
The Commission first identified issues with the VAT rules for public sector bodies and activities in the public interest in its ‘Green Paper on the Future of VAT’ published in December 2010. It may therefore be some time before any changes recommended by the Commission are adopted by Member States, and in the UK, some of these changes may be pre-empted by the Treasury’s review of Section 41 of the VAT Act. We will issue another update when there are further developments.
In a letter to the Recruitment and Employment Confederation (REC), Treasury minister Danny Alexander has warned NHS Trusts against using artificial arrangements designed to avoid paying VAT on locum staff charges.
This follows news reports about schemes used by a number of NHS Trusts, which involve the hire of locum doctors and other staff on short-term employment contracts that fall outside the scope of VAT.
According to the REC, Mr. Alexander confirmed that such contracts would only escape a VAT charge if the evidence proved that a medical professional was being directly employed by an NHS Trust, with the Trust taking on the liabilities of an employer. This evidence included the length of time that a person is engaged for, and he explained by way of example that
‘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.’
We understand that HMRC is undertaking an investigation into this issue and that it anticipates briefing members of Parliament’s Public Accounts Committee in the next few weeks.
If your Trust is one of those that use these schemes, or if you would like further information about the VAT rules which apply to supplies of staff, please do not hesitate to contact us.
The VAT treatment of locum medical staff has also been recently examined in the case of Rapid Sequence Ltd v. HMRC, which was heard before the First-tier Tax Tribunal (FTT).
Rapid Sequence Ltd (the Company) was an employment business supplying locum doctors to NHS Trusts as a principal. The locum doctors operated either as self-employed individuals or through personal service companies, and were paid an agreed hourly rate by the Company, which in turn received payment from NHS Trusts for the provision of the locums’ services. The FTT had to determine whether the Company was providing an exempt supply of medical services, or, as HMRC claimed, a taxable supply of staff.
Under UK law, the supply of a deputy for a registered medical practitioner may be treated as VAT-exempt. HMRC argued that the provision of a deputy doctor is not exempt, but rather a standard-rated supply of employment agency services, and that it is the medical care provided by the doctor which qualifies for VAT exemption.
The FTT agreed, holding that, although the services provided by the Company came under this UK provision, that law must be considered in light of EU VAT law. The EU’s Principal VAT Directive states that exemption shall only apply to ‘the provision of medical care in the exercise of the medical and paramedical professions as defined by the Member State concerned’.
The FTT found that the company was making supplies of staff, as it had no control over the work carried out by its locum doctors, who worked under the ‘direction and control’ of staff at the NHS Trusts they were supplied to. It also found that UK VAT Law goes beyond the scope of the exemption for medical care allowed by the Directive. In light of this, the FTT reinterpreted the relevant provision of UK law to mean that VAT exemption only applied to ‘the provision of [medical care services provided by] a deputy for a person registered in the register of medical practitioners’.
As the company was not providing ‘medical care services’ under this revised wording, but was instead making taxable supplies of staff, the FTT rejected its appeal.
The significance of this decision is that it has, in effect, completely removed the VAT exemption for supplies of deputy medical practitioners from UK law. Suppliers who had relied on this provision when supplying medical staff to the NHS may now be required to charge VAT, as well as account for VAT on previous supplies. However, it is likely that the FTT’s decision will be appealed, and we will issue another update when there are further developments.
HMRC has released updated guidance about changes to the VAT treatment of self-storage services, which came in to effect last year.
Under the previous rules, the provision of a clearly defined space for the self-storage of goods was VAT-exempt (as a supply of land), unless the self-storage operator had ‘opted to tax’ the land/building for VAT. However, from 1 October 2012, supplies of facilities for the self-storage of goods became taxable for VAT, regardless of whether the supplier had exercised an option to tax or not.
In this context, ‘the ‘self storage of goods’ means the storage of goods in a relevant structure (namely the whole or part of any building, unit or container or other structure that is fully enclosed), by the person to whom the supply is made, or a third party with the permission of that person.
HMRC’s updated guidance emphasises that the VAT treatment depends on how the relevant premises are used by the customer. So if, for example, a property is leased to a customer for use as an office, and the landlord has not exercised an option to tax, the rent will be exempt from VAT. If, however, the customer changes its use so that the building is used for storage, the rent will become taxable for VAT at the standard rate.
NHS bodies which lease properties to non-NHS customers should therefore check if these customers (or third parties) are using the properties for storage and charge VAT accordingly. Those NHS bodies which have not correctly accounted for VAT on supplies of storage facilities should now do so, and if necessary, submit a voluntary disclosure of these errors to HMRC.
HMRC are continuing a programme of ‘aspect checks’ on NHS Trusts, whereby a visit is arranged to review a specific area of VAT compliance. One of the areas being checked is whether NHS Trusts are applying the correct VAT treatment to purchases of non-UK goods and services.
Many of these goods and services are subject to VAT in the country of the recipient rather than the supplier, and where a foreign supplier does not have a UK VAT registration, the customer (i.e. the Trust) will have to account for UK VAT on the sterling value of these supplies.
For goods and services bought from elsewhere in the EU, NHS Trusts must self-account for output VAT at the appropriate rate. However, they may also be entitled to recover the same amount as input VAT, if the goods or services relate to a taxable trading activity, or fall under one of the contracted-out services (‘COS’) headings. This rule also applies to services bought from a non-EU supplier, whilst goods bought from outside the EU are subject to VAT on importation (although this will usually form part of the carriage or delivery charge).
NHS Trusts should therefore check that output VAT is being correctly accounted for on foreign purchases of goods and services, and correct any errors where necessary.
The Department of Health has recently released an updated guidance note for PCT and SHA legacy teams about closedown arrangements for VAT.
The note advises that a final VAT return should be submitted for transactions processed in the period from 1st July to 31st August 2013.
Organisations that have already deregistered can still claim input VAT on some services, as long as these services relate to their taxable business activities that were made when they were VAT-registered. The Department advises that these would include, for example, costs incurred in closing down their accounts. It would be assumed that any VAT incurred since April 2013 on eligible contracted-out services could also be claimed.
VAT cannot be recovered on purchases related to exempt supplies, or on goods purchased after de-registration.
For further advice about claiming VAT on legacy body costs and how these claims should be submitted, please do not hesitate to contact us.
As discussed in our July 2013 newsletter, the VAT exemption for business supplies of research between NHS organisations and other ‘eligible bodies’ (such as universities and charities) is withdrawn with effect from 1st August 2013.
HMRC has now published detailed guidance about this withdrawal, which states that the VAT exemption is no longer available for written contracts that were not entered in to by 1 August 2013.
Transitional arrangements are available for written contracts that were entered in to before this date (regardless of whether or not the work had started). These allow business supplies of research to continue being exempt from VAT for the life of the contract, provided that the services performed are within the scope of the contract as it stood before 1 August 2013.
If a contract is extended or varied on or after 1 August (whether or not the consideration payable is increased), then payments for new or changed supplies will be standard-rated for VAT. Minor variations (such as changes to delivery times or the supplier of a sub-contracted service) will not affect the VAT treatment of the original contract.
For research to be subject to VAT, HMRC advises that it must be supplied by way of business and under a contract or other agreement, in return for consideration, i.e. there must be a direct link between the research supplied and the payment received. Research is not subject to VAT when it is funded, either by the public sector or by the charitable sector, for the wider public benefit, although each research project should be considered on its own merits.
NHS bodies that are making, or preparing to make, business supplies of research should therefore consider the VAT treatment of this research. If you would like further information about how these changes might affect your organisation, or need advice about the VAT implications for a research project, please do not hesitate to contact us.
The High Court has released its judgment in a recent case brought by GSTS Pathology LLP and others, against HMRC’s decision to change the VAT treatment of out-sourced pathology services.
GSTS is a public-private joint venture between Serco Ltd and two NHS Trusts, which was established to supply out-sourced pathology services to the NHS. HMRC had previously advised the joint venture that its pathology services were standard-rated for VAT, and that NHS customers could recover this VAT under the contracted-out services (‘COS’) rules. However, in January 2013 HMRC withdrew its earlier ruling, and stated that such services must instead be treated as VAT-exempt.
GSTS appealed against the withdrawal of the ruling to the First-Tier Tribunal (FTT). It also sought an interim injunction from the High Court delaying HMRC’s implementation of the new VAT liability, pending the outcome of the FTT appeal.
Mr Justice Leggatt granted the injunction, noting that HMRC’s withdrawal of its previous ruling was not supported by any material change in the facts, or in the law. He also commented that the European Court of Justice decision in the case of L.u.P GmbH did not, as HMRC said it did, extend the definition of exempt medical care to laboratory tests ordered by a medical practitioner. Furthermore, although the judgment was released in 2006, HMRC had failed to update its published guidance to reflect this interpretation of the L.u.P case.
HMRC has now released Revenue & Customs Brief 16/2013, apparently in response to these comments, which confirms its revised policy and states that existing VAT guidance will be updated ‘in due course’. However, the High Court injunction prevents HMRC from prospectively enforcing this policy against GSTS until three months after the FTT hands down its decision in the main tax appeal.
It remains to be seen whether the FTT will accept HMRC’s change in policy, and we will provide a further update when the FTT reaches its decision.