Some of the Royal Mail’s postal services became subject to VAT from 2 April 2012, including Cleanmail.

We asked HMRC the question back in March whether VAT would be recoverable by NHS bodies on these taxable mailing services and was advised as follows:

HMRC stated that COS heading 13; Collection, delivery and distribution services – applies to services provided by organisations other than the Royal Mail. For example, services provided by couriers, Rail Freight, Federal Express, UPS etc. and therefore, these expenses do not qualify for COS deduction.

HMRC have subsequently agreed (although not yet confirmed by the Treasury) that the removal of competition barriers and application of VAT on certain Royal Mail services had resulted in them being treated the same as other private sector providers. NHS organisations should therefore recover VAT until clarification was received from the Treasury policy team.

HM Revenue & Customs (“HMRC”) has recently issued a letter to NHS bodies stating their policy on contracted-out services (“COS”) VAT recovery on leased equipment.

In summary, this simply re-iterates the rule (which we included in our newsletter of July 2011) that NHS bodies are only permitted to recover VAT on the maintenance of leased equipment (under COS heading 37) where the maintenance is provided by a separate supplier to the one providing the lease hire.

The key point is ‘separate supplier’. Separate charges or separate invoices from the same supplier of the lease hire do not qualify.

Although not explained in the letter, the reason for HMRC’s stance on this is that the supply of services within a lease package is considered economically not dissociable from a supply of the hire of the goods. In essence, VAT recovery on the service element is inappropriate because what is being supplied constitutes a ‘single supply’ of the letting or hire of goods.

If you currently have, or are looking to enter into any lease contracts with maintenance, we would be happy to provide our advice to legitimately save VAT costs with these types of arrangement.

Determining the VAT liability of supplies of staff is far from straightforward and we are frequently asked by our clients whether VAT should be charged. The relevant legislation is not particularly clear on the point and with the advent of penalties for the NHS, clarifying the issue is a means of taking reasonable care.

The following step-by-step guidance should cover most eventualities.

Basic Rules

The basic starting point is that a supply of staff which come under the ‘direction and control’ of the recipient is taxable at the standard-rate. This means that if you make a member of staff available to work elsewhere, and the staff member is given work, instructions, etc by the recipient, this is a supply of staff. Taken from HMRC’s Public Notice (700/34), there are a few exceptions to this rule, where supplies of staff are not always made in the course or furtherance of business and therefore may be outside the scope of VAT (“OS”), i.e. completely non VATable.

These include:

  • secondments between and by government departments (technically, includes the NHS) which require specialist knowledge that cannot be obtained from the private sector;
  • secondments between National Health bodies; and
  • some secondments between local authorities and by local authorities where they have a statutory obligation or monopoly
  • supplies of staff to any person who belongs outside the EU, or to a business belonging in another member state of the EU

In addition, the following are also either outside the scope or exempt from VAT:

  • supplies of nursing staff using the nursing agency concession (exempt)
  • recharges of staff salaries under Section 75 NHS Act 2006 (pooled budget) arrangements (OS)
  • supplies of certain staff to universities under a joint working memorandum (OS)
  • supplies of staff to the prison service under similar memorandum arrangements (OS)

Recharges to Charities

Another area of confusion is recharges of staff costs to charities where the charity is funding the costs as part of its charitable aims. In most instances, the staff remain under the direction and control of the NHS body and therefore the recharge is simply a means of funding their salary by way of a grant or donation. These recharges are also generally outside the scope of VAT.

Recharges of Staff to Local Authorities

With regards to supplies by and between NHS bodies and local authorities, it is worth considering the provisions of Part 3 of the National Health Service Act 2006 on this subject. This includes Section 74 to Section 82 of the Act (which also includes the pooled budget provisions referred to above under Section 75). These provisions remain largely unchanged by the 2012 Health & Welfare Act.

Where an NHS body supplies services of staff to a local authority under the terms of Section 80 of the NHS Act 2006 to enable the local authority to carry out its statutory functions, this is a statutory obligation.

It should therefore be permissible for supplies of staff by NHS bodies to local authorities for statutory purposes to be outside the scope of VAT. Where staff are supplied to local authorities for purposes other than the performance of their statutory functions, then these supplies will be taxable.

Joint Contracts of Employment

In cases of joint employment, there is no supply for VAT purposes between the joint employers.

Staff are regarded as jointly employed if their contracts of employment or letter of appointment makes it clear that they have more than one employer.

The contract must specify who the actual employers are.

Staff are not jointly employed if their contract is with a single employer even if it requires them to work for other organisations. As such, staff employed by a single employer which are supplied to work at another organisation are subject to VAT, subject to the basic rules outlined above.

Supplies of Services

Anything else which is not a supply of staff (i.e. where the direction and control condition is not met) is likely to be a supply of services and the VAT liability will depend upon the nature of the service being provided. This could therefore be taxable or exempt (i.e., if a supply of healthcare).

The ECJ has ruled in the case Banca Antoniana Popolare Veneta (BAPV)(C-427/10) that the normal time limits for a supplier to claim a refund of VAT overpaid to tax authorities could be extended under certain conditions.

The case involved a change of VAT treatment of a supply of services, where the treatment was thought initially to be taxable (and VAT was paid over to the tax authorities), but was retroactively regarded as exempt.

BAPV’s customers brought proceedings against them for repayment of the VAT and their claims were admissible due to the period of limitation in Italy being ten years for such claims.

However, BAPV were unable to recover the VAT they had paid over to the authorities, due to a limitation on such claims in Italy being two years.

According to the ECJ ruling, a supplier should not be financially disadvantaged because of errors by tax authorities which he cannot control. Therefore if the sum a supplier must reimburse his customers is more than he can claim from the authorities (due to more generous civil law time limits for customers than those open to suppliers), then the VAT time limits for suppliers should be extended to ensure parity in the amounts recovered by both parties.

In the UK, the civil law time limit for customer claims for reimbursement for commercial loss is six years, whereas the VAT time limits to claim back overpaid VAT from HMRC is four years.

So, there is a likelihood that at some stage the UK may see the VAT time limit challenged again with a view to matching the civil law time limit.

The following sets out how to properly account for VAT on cycle to work schemes from January 2012, plus some further commentary on the difficulties surrounding lease car schemes.

General Rules

HMRC Brief 28/11 stated that deductions under salary sacrifice schemes would become subject to VAT where applicable from the 1st January 2012.

Trusts already providing bicycles or cars outside of a salary sacrifice arrangement are not affected, as payments received from employees were already subject to VAT and continue to be so.

The subsequent HMRC Brief 36/11 outlined some transitional rules which meant that not all salary sacrifice schemes became automatically taxable from January.

To summarise the transitional rules:

  • VAT must be accounted from 1 January 2012 on agreements in place which were entered into from 28 July 2011.
  • Agreements that were signed or otherwise agreed by the parties on or before 27 July 2011 and which extended beyond 31 December 2011, will continue to be free of VAT until:
    • The date that a fixed term agreement expires or the fixed number of salary sacrifice payments specified within the agreement are completed (if the agreement expired before 1 January 2012, any agreement subsequently entered into should be treated as subject to VAT).
    • The date of an employee’s annual salary/benefits review. HMRC will regard any salary sacrifice arrangements put in place after that date as a new agreement for VAT purposes. This will be the case even if the employee continues to receive the same taxable benefits as before the review.
    • The date of any other review or renegotiation that leads to a change in the provision of benefits under a salary sacrifice agreement or to a change in an employment contract.

Following one of the above events VAT will be due on any taxable benefits provided on or after 1 January 2012 by way of salary sacrifice.

Cycle to Work Schemes

In respect of cycle to work schemes, this means that subject to the transitional rules:

  • Trusts would need to account for output tax on the value of the salary foregone by participating employees in exchange for the hire or loan of a bicycle.
  • Trusts are able to recover VAT as business input tax on the associated hire or loan of goods.

Lease Car Schemes

The changes to the VAT rules affecting lease car schemes are slightly more problematic for pre-existing schemes due to the interaction between the NHS non-business VAT rules and the business VAT rules.

NHS Trusts are able to recover the VAT on the purchase of lease cars, provided with maintenance, under contracted-out services (“COS”) heading 26. COS VAT recovery is however conditional upon the purchase being used for non-business purposes.

As stated previously, where Trusts have charged staff for lease cars outside of a salary sacrifice arrangement, this has always been treated as a business supply with output tax due.

In theory, this means that the VAT incurred on the associated purchase is recoverable as business input tax (rather than COS VAT) at least for the element of private use, however in practice, most Trusts have simply treated this all as COS VAT recovery. To-date, HMRC has never challenged this treatment due to there being no apparent tax loss.

Pre-Existing Schemes

Prior to the changes in the VAT rules, lease car scheme deductions for existing salary sacrifice schemes were outside the scope of VAT (i.e. non-business) with no output tax due. As such, Trusts continued to recover VAT on associated lease costs under the COS rules.

This has meant that in most cases, pre-existing scheme employees have benefitted not only from PAYE and NI savings, but also from a lower cost lease car, due to the amounts sacrificed being net of VAT.

Apart from the transitional rules outlined in HMRC Brief 36/11, most schemes have now become taxable from 1 January 2012. This means that the VAT incurred on the associated lease cost will remain recoverable by the Trust, albeit strictly speaking as business input tax rather than COS VAT.

Because the VAT on pre-existing schemes was already being recovered with the net cost charged to the employee, the output tax now due will be a further cost to either the employee or the Trust. This depends upon whether the charge to the employee can be increased to take account of the VAT under the terms of the agreement.

There are added complications where NHS Trusts have utilised car schemes set up by other NHS bodies, where the recharges between the organisations have been VAT free due to the divisional registration rules. In these circumstances, the NHS body running the scheme is likely to have recovered VAT under the COS rules and charged the net cost onto the employer Trust, which in turn has charged the net cost onto the employee.

We understand that HMRC has referred a paper to HM Treasury concerning the VAT treatment in these circumstances and also whether the normal business 50% VAT restriction on lease cars (applicable to the car but not the maintenance for taxable businesses) has any bearing where cars are made available for personal use.

Until further guidance becomes available, VAT should be declared on the deductions from the employer Trust to employees.

The VAT Tribunal of the Field Fisher Waterhouse case TC/2010/01947 has requested a ruling from the ECJ to establish the correct treatment of common area service charges in respect of leased properties (where no option to tax has been exercised, or one cannot be exercised).

The case questions whether service charges under a lease of a non-opted building are consideration for a separate supply subject to VAT. Essentially, the Tribunal is asking if the decision in the Tellmer case (C-572/07) can be used within the Field Fisher Waterhouse situation.

In the Tellmer case, the ECJ held that the letting of flats in a block and the cleaning of its the common areas should be considered as individual components of two separate supplies for VAT purposes, and that the cleaning services are a separate taxable supply, rather than subsumed within the exempt supply of letting.

The outcome of this case will be very important as it will confirm whether or not landlords make single or multiple supplies of similar services for VAT purposes. Currently, the UK VAT perspective holds that service charges are viewed as closely linked to the supply of letting and attract the same VAT liability. This is because the maintenance and cleaning of common areas of leased properties are usually provided for by landlords within tenancy agreements.

The forthcoming decision will provide much needed clarification for NHS Bodies and the potential for VAT recovery in respect of service charges which could potentially fall under the COS rules (e.g. cleaning, maintenance). It will also have a bearing upon the VAT liability of property leased by Trusts to non-NHS tenants (e.g. GPs, CICs, etc).

The Sue Ryder charity has been campaigning to change Government policy on VAT relief for charities providing hospice care, which has resulted in a proposed amendment to the Health and Social Care Bill.
A new Bill is now moving through Parliament which will make provision for charitable healthcare providers taking on new responsibilities from the NHS.
As part of the health service reforms, more NHS services will transfer to the charity sector, so Sue Ryder is encouraging the Government to put charitable healthcare providers onto an equal footing with the NHS in relation to VAT recovery.
The point of this Bill is to aid cash flows and stem running costs of the Not for Profit organisations undertaking new tasks (e.g., Sue Ryder), where they appear at a financial disadvantage in comparison to NHS bodies performing similar tasks.
It is unclear how this will impact other income streams of the charity sector and how it will be implemented and whether the proposed cost sharing VAT exemption scheme in the next Finance Bill would have any bearing, but we will update you as soon as information is available.

HMRC has published two updated VAT Notices (701/31 – Health Institutions and 701/57 – Health Professionals). These include a few areas of clarification which are of interest to NHS bodies.

These are:

Self Employed Locums

As part of the Health Professionals update, the VAT treatment of supplies made by self-employed GP locums, has been clarified. This now states that when self–employed GP locums supply their services to an employment business which makes an onward supply to a third party who is legally responsible for providing health care to the final patient, both the supplies to and from the employment business are taxable.

Doctors supplying locum services via employment agencies or on a self-employed basis where the recipient of the service (e.g. an NHS body) is legally responsible for the care should consider whether VAT registration is required.

It must also be noted that where an NHS body utilises agency locums or locums operating through their own company or on a self-employed basis, any VAT charged will not be recoverable by the NHS body.

Contracted-Out Pharmacy Arrangements

The updated Health Institutions notice now provides additional guidance on independent pharmacies operating within hospitals. By concession, HMRC allow pharmacists (including those operating from an independent pharmacy within hospital premises) to zero-rate drugs, medicines and other qualifying goods that are supplied to:

  • an in-patient of a hospital or
  • any person attending the premises of a hospital for medical care or treatment where all of the following conditions are met:
  • The items dispensed are qualifying goods designed or adapted for use in connection with medical or surgical treatment
  • The items are dispensed by a pharmacist in the normal way, on the prescription of a medical practitioner who is providing primary health care services
  • The items are intended for self-administration by the person named on the prescription
  • The items are supplied separately from, and do not form any part of, any medical services, treatment or care provided in the hospital or nursing home
  • In the case of NHS prescriptions, the pharmacist is acting under the appropriate NHS Pharmaceutical regulations, and is reimbursed for the dispensed items by one of the NHS bodies that pay for community pharmacy services.

The notice goes on to state that the application of this concession must not give rise to any abuse of the VAT system and HMRC may withdraw or restrict the application of this concession if they have reasonable cause to believe that it is being used for tax avoidance purposes.

The full revised notices can be obtained from the following links:

VAT Notice 701/31 – Health Institutions

VAT Notice 701/57 – Health Professionals

Under the VAT rules, certain medical equipment can be zero-rated where the equipment is a medical or surgical appliance that is designed solely for the relief of a severe abnormality or a severe injury, and has been purchased for the personal or domestic use of a person defined as ‘chronically sick or disabled’. This particular relief is not however available when the purchase is funded by an NHS body.

Zero-rating is however available for certain equipment purchased by an NHS body wholly from charitable funds.

Therefore, where NHS bodies make purchases of this nature from non-charitable funds, suppliers should charge VAT at the standard–rate (20%).

Generally speaking, there is no VAT recovery available for such products by NHS bodies under the contracted-out services (“COS”) rules and there is unlikely to be VAT recovery under business VAT rules. However, if the NHS body purchases maintenance, repair or support in respect of such products, VAT recovery under COS may be available subject to the normal conditions.

HMRC are currently considering enacting the VAT Cost Sharing Exemption. This is a provision of EC VAT law not currently applicable in the UK which allows businesses and organisations making VAT exempt and/or non-business supplies to form groups in order to achieve cost savings.

The principal benefit of the exemption is that by removing a VAT charge on supplies of goods and services between certain organisations, it will facilitate efficiency savings for organisations working together which are unable to recover all of their VAT on purchases.

If enacted, this exemption may enable cost savings on transactions between NHS bodies and social enterprises or charities, where these types of organisation have taken responsibility for previous NHS functions and the addition of VAT on re-charged costs can be a burden.

HMRC are due to publish their findings from a consultation process on policy design and a framework for possible future implementation. We will inform you of this as soon as further details are available.