Following the judgment of the House of Lords in the joined cases of Fleming/Condé Nast in 2008, many NHS Trusts submitted VAT claims to HMRC for input VAT which had been under-recovered, or output VAT which had been over-declared, in prior accounting periods.

Some types of claim have been accepted by HMRC, such as those for output VAT which was over-declared on catering income. These accepted claims have been paid out in part, where HMRC have agreed that the claimant Trust has entitlement to earlier periods. There may still be scope for further payments pending the entitlement appeals. Other claims have been rejected, including those for input VAT on drugs and prostheses supplied to private patients. These claims relied on the earlier decision of the Court of Appeal in the joined cases of Wellington Private Hospital /BUPA in 1997. The Court held that supplies of drugs and prostheses to private patients qualified as separate, zero-rated supplies of goods, meaning that VAT incurred on the purchase of these items could be recovered as input VAT.

HMRC has rejected these claims on the grounds that the Court’s decision is undermined by subsequent case-law, and therefore cannot be applied retrospectively. Following an appeal, the FTT has now agreed with HMRC, in its recently released judgment in the Nuffield Health case. Rejecting Nuffield’s appeal against HMRC’s refusal of its VAT claim, the FTT held that there was no meaningful separation between the supply of the care elements of the service and the supply of drugs/prostheses as a part of that supply. As such, Nuffield was providing a single, exempt, supply of health care to the patient.

The Nuffield appeal was the lead case for all appeals against HMRC’s rejection of Wellington/BUPA VAT claims, including NHS appeals. It remains to be seen whether Nuffield will appeal this decision to the Upper Tribunal. We will keep you informed if there are any further developments.

NHS organisations should also be aware that the VAT exemption for business supplies of research to other ‘eligible bodies’ (such as universities and charities) will be withdrawn from 1st August 2013.

The decision follows a notification from the European Commission that the exemption does not comply with European law. Currently, business supplies of research between two eligible bodies are exempt from VAT (e.g. research work which is sub-contracted by one eligible body to another), but under the new rules these supplies will become standard-rated for VAT purposes.

The withdrawal of the concession will not affect non-business research, which is defined as research in the public good that is either block-funded (e.g. from a central government grant) or funded by a grant from a body which does not receive goods or services in return (e.g. a research council). This research will remain outside the scope of VAT.

Most supplies of research made by NHS organisations are likely to be grant-funded, and so will not be affected by these changes. However, we await further guidance from HMRC about how these changes will be implemented, such as whether the new rules will apply to research projects in progress on 1st August. It will be worthwhile for NHS Trusts, when reviewing the details of ongoing and future research projects, to determine whether the VAT treatment will change.

HMRC has just released revised guidance on COS heading 37, which supersedes guidance that it had previously issued to NHS organisations in May 2012.

This previous guidance stated that VAT could only be recovered on the supply of maintenance services for leased equipment if this maintenance was provided by a separate supplier to the one making the supply of the lease hire.

HMRC now say that, provided the maintenance is supplied under a separate contract from that of the lease hire, the VAT can be recovered under COS heading 37, even if the maintenance is provided by the same supplier.

HMRC explain that this change in policy is necessary following the decision of the First-Tier Tax Tribunal in the case of Goals Soccer Centre plc. The Tribunal held that the appellant, which owned and operated five-a-side football pitches, was making separate supplies of VAT-exempt pitch hire and standard-rated league participation services for those customers who were in a league. It was not, as HMRC argued, making a single composite supply of league participation/management services which was wholly standard-rated.

The Tribunal placed heavy emphasis on the contractual arrangements for these services, noting that pitch hire and league participation services were subject to separate contracts, with separate terms and separate prices, and that a breach of one contract did not automatically mean a breach of the other.

HMRC has confirmed that the change in policy based upon this decision which was released on 10th September 2012 only supersedes the guidance stated in its May 2012 letter concerning leases and maintenance and not more general COS heading 37 guidance.

Many NHS organisations have already received further correspondence from HMRC reiterating its previous stance on leased equipment and heading 37, and requesting details of VAT recovered on the maintenance of this equipment. In light of the revised policy, NHS organisations can now recover any unclaimed VAT incurred on the maintenance of leased equipment in the current financial year, if the maintenance is provided under a separate contract. This VAT must be reclaimed on a VAT return which is submitted no later than 7th July 2013. NHS organisations should also use this method to recover VAT on qualifying maintenance which may have been repaid to HMRC in the current financial year following the issue of the May 2012 letter.

It should be noted that VAT incurred on the leasing or hire of equipment, plant or vehicles remains non-recoverable, with the exceptions of the ‘hire of reprographic equipment including repair and maintenance’ (COS heading 25) and the ‘hire of vehicles , including repair and maintenance’ (COS heading 26). In both these cases, VAT is only recoverable on contracts for the supply of the equipment/vehicles together with full repair and maintenance services.

The First Tier Tax Tribunal (‘FTTT’) has recently held that where a customer over-pays for parking, the excess amount paid is to be treated as an ex-gratia payment, not subject to VAT. This offers the opportunity for NHS Trusts to make a protective VAT reclaim where they have accounted for output VAT on over-payments received for parking charges.

Background

The FTTT allowed an appeal brought by the Borough Council of Kings Lynn and West Norfolk (‘the Council’) against a refusal of their VAT reclaim by HMRC. The Council operates pay-and-display car parks where customers pay in advance at ticket-dispensing machines. These machines accept coins only and no change is given, but over-payments are accepted. Daily parking is available for periods between 8.00 a.m. and 6.00 p.m. and costs £1.40 for 1 hour, £2.10 for 3 hours and £4.10 for 5 hours.

The Council had previously accounted for output VAT on all its takings from these car parks, but argued that where a customer had over-paid for parking, no output VAT should be due on the over-paid amount. It contended that this over-paid cash was a form of ex-gratia payment, as customers without exact change could choose to make an over-payment for a parking ticket, but would receive nothing extra in return. Where, for example, a customer paid £2.00 for 1 hour of parking costing £1.40, the customer would still only obtain the right to park for 1 hour.

The FTTT agreed with the Council, holding that for a sum of money to be taxable consideration, there must be a link between what is supplied and what is paid for. Customers could not change the amount of consideration for a parking ticket by paying more or less than the specified tariff, and it was only this tariff price which was taxable for VAT.

HMRC has yet to indicate whether it will appeal.

Relevance to the NHS

NHS Trusts which have received over-payments on car parking charges should now consider making a protective claim to HMRC for any output VAT they have declared on these amounts, in any periods within the last 4 years.

We would be pleased to assist with the preparation and submission of a protective claim, which we offer as part of our business activity/accounts receivable review process. Any protective claim will need to be supported by evidence of over-payments, which we can calculate using your records of tickets issued to car park customers and cash income received.

For further information about the case, and to discuss this opportunity for claiming refunds of over-paid VAT, please do not hesitate to contact us.

In our last newsletter, we advised that the scope of VAT recovery under this COS heading is likely to be changing.

It has always been common practice for NHS bodies to recover VAT on supplies of admin and clerical agency staff under COS heading 69.

We now understand that HMRC plan to revise this interpretation and apply the guidance notes for Government departments to the NHS from a prospective date.

The Government department guidance states the following:

69. Typing secretarial, telephonist and clerical services including agency staff

Includes:

• VAT incurred on supplies by agencies providing typing, secretarial, telephonist and clerical services using their own staff
• Provision of typing services by a word processing bureau

Excludes:

• Secondees
• Employee expenses

If agency staff are utilised because of difficulties in recruiting staff to fill permanent posts or are brought in to supplement existing staff levels during busy periods then these would not satisfy the criterion of being a contracted out service for these purposes and consequently any VAT incurred would not be recoverable.

This completely removes the ability to recover VAT on admin/clerical agency staff, allowing VAT recovery on admin/clerical ‘services’ only. The wording ‘including agency staff’ now seems completely obsolete, which makes its inclusion in the Treasury Direction since 1997 something of a mystery.

NHS bodies would therefore be well advised to review the current levels of VAT recovery under COS heading 69 with a view to including this in future budgets.

Many NHS bodies are currently undergoing a compliance check from HMRC on VAT recovered under COS heading 37.

This is a follow-up to the previous letter from HMRC of May 2012 concerning VAT recovery under COS heading 37 and whether this is in relation to leased equipment and if so, whether it is by the same supplier.

The follow up enquiries have however extended HMRC’s apparent interpretation of the rules as follows:

• You cannot claim if a stipulation or requirement exists which states you must use a named supplier for the maintenance, repair and cleaning. This may be due to warranties, guarantees or lease/lease purchase agreements which are dependent on use of certain suppliers (this applies to both owned and leased items).
• You cannot claim the COS VAT for leased items when the supplier of the item is the same as or connected to the one providing maintenance, repair and cleaning.

The first statement concerning owned equipment appears to be something which HMRC has never stated before in any guidance.

It is our understanding that NHS bodies would not generally purchase equipment in circumstances where a supplier stipulates that the maintenance could not be carried out in-house or by a third party. Many NHS bodies follow a purchasing process whereby a supplier of equipment is not selected unless they can provide operating manuals and/or training for in-house (i.e. EME department) or third-party maintenance staff.

Furthermore, such stipulations could be considered illegal under the Competition Act 1998 and therefore void and unenforceable even if they are included in a contract.

As such, there is likely to be no bar to recovering VAT under the COS rules covering heading 37 for owned equipment or equipment leased from a separate supplier, because there can be no legally enforceable stipulation to use a named supplier. If an in-house capability exists at the time a contract is entered into, the conditions for recovery have been met.

Please contact us if you require assistance with responding to HMRC’s enquiry.

The VAT liability of self-storage has changed with effect from 1 October 2012.

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 ‘opt to tax’ the land/building.

Providers of other types of storage services (such as traditional removal companies) which do not provide their customers with a discrete area and are able to move their customers’ goods around within their premises, already charged VAT on their supplies.

With effect from 1 October 2012, supplies of self-storage facilities will be standard-rated regardless of whether the supplier has exercised its option to tax.

Crucially, it will be necessary for the supplier to obtain confirmation from his customer of the use to be made of the space.

NHS bodies which supply space to non-NHS customers should therefore review arrangements to determine the use to which the space is being put in order for VAT to be charged where appropriate.

These changes mean that self-storage providers including NHS bodies that have not previously opted to tax may, subject to the normal rules, be able to recover VAT incurred on related costs, including VAT bearing expenditure of £250,000 or more on certain assets such as land and buildings, which fall within the Capital Goods Scheme (CGS).

Finally, NHS bodies are able to recover VAT incurred on traditional storage services under COS heading 63, however where NHS bodies are supplied with space for self-storage, this would not meet the contracting-out criteria as this is simply a taxable supply of land.

We have learnt that the scope of VAT recovery under this COS heading is likely to be changing.

It has always been common practice for NHS bodies to recover VAT on supplies (from staff agencies) of admin and clerical staff under COS heading 69. Up until around 2007, it was in fact common practice for NHS bodies to recover VAT on all agency staff under this heading, however it was clarified by HMRC back in 2007 that this was meant only for agency staff filling secretarial, admin and clerical type roles. VAT on senior staff (managers, etc) was not to be included.

Since 2007 and up until very recently, we have had further correspondence with HMRC where this position has been confirmed. For example, HMRC wrote to some of our clients recently asking to see details of VAT recovery under COS heading 69 where the position on ‘junior’ vs ‘senior’ admin staff was re-confirmed.

HMRC have recently stated however that the interpretation of this COS heading is being changed, and that it is not meant for supplies of any staff.

Considering the fact that the Treasury Direction currently states ‘including agency staff’ and HMRC has confirmed this in various correspondence and visits up until very recently, we are awaiting formal guidance on when or whether the Treasury Direction will be amended.

We would therefore suggest that NHS bodies rely upon the published guidance and current wording of the Treasury Direction until formal changes are announced. This presumably would be from a future date going forward.

As stated in an earlier newsletter, HMRC have been considering their policy concerning the interaction of the NHS COS VAT rules (in particular, COS heading 26; Hire of vehicles including repair & maintenance), and the 50% blocking order VAT restriction on lease cars (applicable to the car lease but not the maintenance). This review is in light of the changes to the salary sacrifice VAT rules, where, subject to transitional arrangements, schemes have been treated as business supplies since January 2012.

Under the normal business VAT rules, 50% of the input tax incurred on the lease of a car is blocked from recovery. This means that a fully taxable business which is generally able to recover all of its VAT can only recover 50% of the VAT on a lease car. The ‘blocking order’ also applies to partly exempt businesses, where 50% of the VAT is blocked and the remaining 50% of ‘allowable’ VAT must be taken into account in the partial exemption method.

HMRC’s published guidance states that where a business which has blocked input tax makes a car available for private use of an employee for a charge, output tax need not be accounted for.

We have been informed that following consultation, HMRC are looking to apply this rule to NHS bodies making cars available to staff under a salary sacrifice agreement. This will presumably mean that the salary sacrifice amount will be deemed ‘outside the scope’ of VAT, rather than a taxable supply.

What this should mean (although not yet confirmed by HMRC) is that the remaining 50% of input tax which is not blocked will go into the Trust’s business/non-business and PE method, meaning in most cases, the vast majority of the VAT will be recoverable under COS heading 26. HMRC have not yet commented on the treatment of the VAT on the maintenance element, although presumably 100% of this VAT will be treated in the same way as the 50% of the lease VAT.

Hopefully, HMRC will publish their revised guidance shortly.

We have had some further guidance from HMRC on the matter of GPs charging for advice on setting up CCGs.

HMRC have in the past advised GP practices that VAT should be charged (depending upon registration limits, etc) for these services. Furthermore, provided the work is of an advisory nature, the VAT should be recoverable by the recipient PCTs under COS heading 52. This advice was confirmed by HMRC as being correct.

HMRC has now advised that, any payments made to GPs for practice based commissioning work is ‘outside the scope of VAT’ and this applies to payments by PCTs to GPs for transitional work on CCGs.

This is quite important as it would seem that HMRC have previously taken a hard line with some GP practices which have failed to register and charge VAT. Also, some if not most GPs are only potentially liable to register as a result of this type of income, so it would appear from the last point that some may have registered for VAT and been penalised incorrectly and the PCTs are incorrectly recovering VAT charged.

Based upon this revised guidance, the GPs which have charged VAT should raise credit notes and re-issue their invoices without VAT. The VAT recovered by the PCTs should also be adjusted for in the VAT accounts.