You will probably be aware that the VAT rate is due to revert to 17.5% with effect from 1 January 2010.  Some opportunities may be available to benefit from the existing 15% rate, but “anti-forestalling” legislation introduced by HMRC in the 2009 Budget must be fully considered first.  The aim of HMRC’s rules is to prevent purchasers of goods and services from taking an unfair advantage of the rate change.  If you believe any of the transactions your NHS body undertakes or shall undertake need consideration in respect of the VAT rate reversion, please feel free to contact us.

Following are examples of how the rules shall apply:

• If goods are ordered, invoiced, delivered and paid for by an NHS body by 31 December 2009, it will not have to pay an additional VAT charge. Therefore an opportunity would exist for the NHS body to gain a VAT saving before the rate reverts to 17.5%.
• If an NHS body buys an equipment leasing contract or other services and an invoice is issued to it before 1 January 2010, then VAT should be charged at 15%. Provided that this is standard practice under the terms of the contract and payment is due within 6 months, there will be no additional 2.5% VAT charge.
• If an NHS body is engaged in an on-going construction contract (where VAT may not be eligible for recovery), it will be advantageous to ask contractors to issue invoices for work carried out up to December 2009 by 31 December 2009 so that it can be charged at the 15% rate. An advanced payment for future works could also be made (up to £100,000). (N.B., A pre-payment in excess of £100,000 which is made before the rate change (i.e. before 1 January 2010) for goods or services to be provided after the rate change, will attract an additional VAT charge of 2.5% unless it is in line with normal commercial practice ).

You can ask a supplier who raises an invoice after 31 December 2009 to split the invoice between the two rates on the value of the work undertaken before and after the rate change.

NHS Bodies Issuing Invoices

We would advise that in the build up to the VAT rate change date (31 December 2009) NHS bodies aim to keep their invoice issuing as up to date as possible.  This will lead to them receiving payments sooner, and avoid difficulties which may arise if invoice issuing is delayed after goods or services are supplied.

In a further development of the VAT treatment of supplies of agency staff, HMRC have made available a draft business brief which aims to clarify their policy on the VAT treatment of supplies of health professionals, nursing auxiliaries and care assistants by employment agencies.

HMRC states that where an agency supplies registered health professionals such as doctors, dentists, physiotherapists (including locum staff) as a principal to a third party, e.g. an NHS Trust, it is making a taxable supply of staff and not an exempt supply of healthcare.   This is on the basis that the health professional is working under the control and guidance of the third party and it is therefore the third party which is responsible for providing healthcare to the final patient, rather than the business supplying the staff which has no such responsibility.

The brief goes on to state that a taxable supply of staff is made even where the agency is responsible for ensuring that the workers it provides are properly trained and qualified when they work under the control of the third party.

A taxable supply of staff is also made where self-employed staff (such as doctors) are supplied to a third party, where there may be no other staff with medical knowledge.  This is because, even if the third party cannot supervise doctors’ medical proficiency, it nevertheless controls where and how the doctors work within its institution and is ultimately responsible for providing the healthcare.

HMRC states that exceptionally, if an agency uses its staff to make a supply of healthcare to the final patient, it is providing healthcare which is therefore exempt from VAT, (although this is unlikely to happen in practice as employment agencies are generally in the business of providing staff to third parties rather than healthcare to patients).

Concession for Supplies of Nurses and Nursing Auxiliaries

By concession, agencies supplying nurses may still exempt supplies of nursing staff and nursing auxiliaries supplied as a principal to a third party provided the business is registered with one of the relevant statutory care institutions.   This concession also extends to supplies of nursing auxiliaries provided they perform some form of medical care.

Is HMRC’s Policy Right?

The current VAT legislation states generally that VAT exemption for healthcare services is based upon the professional qualifications of the individual ‘person’ engaged in providing the service.  This covers services of registered medical practitioners including doctors and nurses, midwives, etc under the same umbrella.

Furthermore, the legislation includes supplies of services made by a person who is not a registered health professional, but where the services are wholly performed or directly supervised by a person who is registered.

This would therefore suggest to us that an employment business providing medical practitioners should still be able to exempt its supplies, as it is the person supplying the services and the services are wholly performed by registered persons (i.e. the registered doctors, nurses, etc which are being supplied).

To state that this is a taxable supply of staff seems to go against the spirit of the legislation as VAT should only be levied on goods/services not covered by the exempt/zero/reduced rate schedules.

The suggested nursing agencies ‘concession’ could lead to an illogical situation where the services of an unqualified nursing auxiliary could be treated as an exempt supply of healthcare, but the medical services of a qualified doctor are taxed as a supply of staff.

How This Affects the NHS

Bearing in mind most of these types of supplies are made to the NHS, the concession for nurses is irrelevant as the NHS is currently allowed to recover VAT on nursing agency services under the contracted-out services rules.  The NHS is not however permitted to recover VAT on doctors/locums.

HMRC have asked for comments on the draft legislation and we have made our points known to them, however as in previous consultations, we expect HMRC to issue the brief soon with no changes.

This will therefore have the effect of further increasing the level of irrecoverable VAT on agency staff, as some of the agencies which currently still do not charge VAT will presumably be forced to adopt this clarified VAT treatment.

CRS VAT Consulting is a firm of chartered tax advisers specialising in pro-active and innovative VAT solutions.  Since 2002 we have grown to become a leading provider of VAT services to the NHS.  We have achieved this by consistently identifying increased levels of VAT recovery and providing flexible services tailored to the specific needs of our clients.

Our credentials can be checked with the Chartered Institute of Taxation, which is the senior professional body in the United Kingdom concerned solely with all aspects of taxation.

In our last few NHS VAT updates, we have informed NHS bodies about the ‘potential’ changes to the contracted-out services (“COS”) VAT recovery headings, in particular heading 52.

There is still a great deal of uncertainty and speculation regarding the nature and timing of these changes, so in order to provide some clarity for our NHS clients we have sought to obtain some definitive guidance from HM Revenue & Customs (“HMRC”).  The following is correct at the date of this publication:

• The revised COS heading 52 has been approved by HM Treasury, although it has not yet been published. HMRC do not known when the Treasury Direction will be published.
• The revised heading reads as follows: ‘Professional advice or opinion on departmental efficiency or policy issues, legal advice or opinion and internal audit’.
• When published, this heading will only allow VAT to be recovered on professional fees if they are of the type that fall within the definition above. This therefore seems to exclude professional services of architects, quantity surveyors and other advisers involved in capital projects.  Services of solicitors and internal auditors will remain eligible for VAT recovery.  Services of advisers relating to projects aimed at efficiency, cost savings and policy will remain eligible for recovery.
• It is not known if there will be a transitional period leading up to the change, however based upon previous Treasury Direction publications, this now seems unlikely. The rules are therefore likely to take effect immediately from the date of publication by the Treasury.
• Until the revision has been published, the current interpretation of COS heading 52 should be used.

In summary, HMRC are relatively certain that the changes will come into effect at some point, however they do not know when.  Given the level of uncertainty, NHS bodies would be wise to consider including the VAT on professional fees as non-recoverable in future capital expenditure budgets.

In our view, the speculation surrounding these changes has left the NHS in an extremely difficult position. The wording of this new heading still seems ambiguous and open to interpretation and there are likely to be a large number of services on which the future VAT treatment will be unclear.

Please contact us if you wish to discuss how these important developments will affect you.

As outlined in previous updates, we are in the process of submitting ‘Fleming’ VAT claims for NHS Trusts prior to the 31 March 2009 deadline.  HMRC accept that any claim will be based upon estimating/extrapolating more recent accounts information and we have a range of methodologies and practices in place to extract the relevant information and formulate a realistic claim relating to a number of key areas.

Some of the claims that we have submitted so far have exceeded £1m.

If you have not yet considered whether a Fleming claim is relevant for your NHS organisation, please contact us as soon as possible.  We would be more than happy to visit at short notice and formulate a claim prior to the deadline.

HMRC recently issued a Revenue and Customs Brief explaining their change in policy on the VAT treatment of excess charges for car-parking.

Previously, HMRC considered that in non-local authority car parks (including NHS operated car-parks), excess parking charges were additional consideration for a supply of parking and therefore subject to VAT.  However, they have now reconsidered their position and state in the Brief that:

…where a car park operator makes an offer of parking under clear terms and conditions, setting punitive fines for their breach, the fines constitute penalties for breaching the contract, rather than additional consideration for using the facilities.

The result of this is that many excess car parking charges will be treated as outside the scope of VAT for all car-parking operators including NHS organisations.

Excess Charges Not Subject to VAT

The penalty charges that will no longer be subject to VAT are those that are levied where a driver is in breach of the terms of the contract.  The commonest situations where a driver may be in breach of the contract are:

• no parking ticket on display
• underpayment
• overstaying purchased parking time
• returning within a specified time
• parking outside marked bays
• parking in bays set aside for disabled drivers or parents with children

Excess Charges Subject to VAT

Where the terms and conditions make it clear that the driver can continue to use the facilities after a set period upon payment of a further amount without being in breach of the contract – for example, no charge for an initial three hours parking but £40 if that period is exceeded – then the payment will be consideration for use of the facilities and subject to VAT.

Going Forward

From now on, income from car-parking should be split in order to identify the non-taxable excess charges and VAT should only be declared on the taxable charges.  If Trusts have accounted for VAT on excess car-parking charges in the past, (which is likely), it will be possible to make a claim for the overpaid tax, subject to the three-year cap.  There may also be scope to submit a further claim for overpaid VAT under the ‘Fleming’ rules, i.e. relating to car-parking income up to 1997.

HMRC have recently announced changes to its management of tax for Public Sector bodies including some of the larger NHS bodies.  They have created a new national team within local VAT office compliance and have appointed Customer Relationship Managers (“CRMs”), who will be responsible for the day-to-day contact between HMRC and Trusts with a view to improving communication and tax compliance.

We have discussed these developments with the current national NHS VAT Team within HMRC and can confirm that they will still be dealing with technical VAT issues for the NHS, however in some instances the direct contact may be via the CRM.

Changes which came into effect from 1 May 2007 meant that certain medical services which were previously treated as exempt from VAT became subject to VAT at the standard-rate.  We announced in our previous bulletins that these changes affected NHS Trusts which generate non-NHS business income from activities such as clinical trials or occupational health services.

One of the most relevant areas of change for the NHS was ‘post-mortem examinations and reports’ provided to coroners, which became fully taxable from 1 May 2007.

Some NHS bodies may still not have changed their VAT treatment of this income and this may result in HMRC assessing for the undeclared output tax to-date.  As this income is usually invoiced to councils and local authorities which are able to recover the VAT, Trusts would be advised to consider issuing additional invoices for the VAT not charged to-date and start declaring VAT correctly in the future.

This change in VAT treatment also creates a right to recover input tax on certain costs associated with this income generation area.

As outlined in the pre-budget report, the standard rate of VAT will fall from 17.5% to 15% for a thirteen month period from 1 December 2008 to 31 December 2009, when it will return to 17.5%.

Any sales of standard-rated goods or services that take place on or after 1 December 2008 should be at the new rate of 15%.  There are no changes to sales that are zero-rated, at the reduced-rate (5%), or exempt from VAT.

There are a number of issues to consider concerning the tax point (time of supply) and whether VAT is charged at the old or new rate, in particular for supplies spanning the rate change.  For the NHS as a purchaser, it is particularly important to ensure that you are not charged more than you need to be if the VAT is a cost to you, i.e., where the VAT is not recoverable.

It is also important that your accounting software is adaptable to take account of the changes both in terms of expenditure (purchases) and business income generated (sales).

Expenditure

Any invoices received from your suppliers from 1 December 2008 must show the new 15% VAT rate for standard rated items, except:

1. where the goods or services were received more than 14 days before the invoice was issued, for example if you are invoiced on 1 December for goods or services received before 18 November 2008, or
2. you paid for the goods or services before 1 December 2008

In these cases, the standard rate of 17.5% still applies.  You may therefore still receive some invoices from suppliers after 1 December showing 17.5% VAT but it is important to ensure that these are valid and not simply errors by your suppliers.

Pre-Payments or Invoices in Advance of Delivery

If you have been invoiced or you have paid for goods or services in advance (i.e. before 1 December) and the goods/services are to be delivered in December or later, the supplier can elect to use the date of delivery as the tax point and charge VAT at 15%.

Where a tax invoice has been issued before the rate change and you wish to take advantage of the 15% rate of VAT in these circumstances, a credit note must be issued by the supplier.

One-Off Supplies of Services

The default tax point for a one-off supply of services is the date of completion.  Under normal circumstances, this is overridden if it is preceded by a tax invoice or payment.  However, if services are performed over a period that includes the date of change, suppliers can elect to apportion the work to reflect the amount that is appropriate to the new VAT rate.

Stage Payments

If you are making stage payments for long contracts, such as construction schemes, the relevant date for VAT is normally when a VAT invoice is issued or a stage payment is made.  So any invoices received for stage payments on or after 1 December 2008 must have VAT accounted for at 15%, even if some of the work was performed before 1 December.

Business Income

Invoiced sales

The same basic time of supply rules as above apply to ‘invoiced’ income generated by the NHS, e.g., sales of drugs to private hospitals.

It will be necessary to make sure your accounting systems and software can be adapted to account for VAT at the new rate.

Cash sales

Cash income, e.g. catering, car-parking, vending, etc., received from 1 December will be at the new rate of 15%, so the VAT fraction to be applied to gross takings should be 3/23rds (not 7/47ths).

As outlined in our previous updates, the VAT staff-hire concession which is currently in place allows certain supplies of temporary workers by employment businesses (agencies) to exclude the wages element when charging VAT, i.e. VAT is only due on the commission (unless the commission turnover is less than the VAT registration threshold).

Some employment businesses have historically chosen not to apply the concession and have charged VAT on the whole value of their supplies, whereas others including many nursing and medical staffing agencies have adopted the concession.  It was announced in the March 2008 Budget that this concession will be withdrawn from 1 April 2009, meaning VAT will be due on the full value of staff supplies by all employment businesses.

Historically, NHS bodies have always recovered the VAT on all agency staff with the full knowledge of HMRC, however over the last couple of years HMRC have tightened up on VAT recovery on agency staff under the contracted-out services (“COS”) rules.  NHS bodies are still able to recover VAT on supplies of nursing staff (including non-qualified nurses, healthcare assistants, etc.) under COS heading 41 and admin/clerical grade staff under COS heading 69.  VAT cannot be recovered under any COS heading on the supplies of any other staff provided by an agency, such as doctors, locums, consultants, social workers, physiotherapists, senior IT staff, senior finance staff, etc.

With regards to nursing staff and admin/clerical staff, the removal of the concession will only represent a cash-flow disadvantage because the additional VAT charged is still recoverable.

The removal of the concession will have a detrimental effect of increasing irrecoverable VAT on supplies by agencies which use the staff hire concession and which supply staff that are not eligible for VAT recovery.   This is particularly applicable to locum and other healthcare staff agencies, where use of the concession is widespread.

It would therefore be prudent to assess the impact on your 2009/10 budgets and plan accordingly by:

1. identifying which staff employment agencies you use
2. identify which agencies currently adopt the concession
3. differentiate between VAT recoverable and VAT irrecoverable staff supplies
4. assess the potential increase in irrecoverable VAT

In our April update, we informed NHS bodies about some potentially wide sweeping changes to the COS recovery headings.   The current Treasury Direction on COS VAT recovery has not changed since December 2002, however HM Treasury has been ‘reviewing the situation’ concerning the list for a couple of years now.  In advance of any revised Direction being published, HMRC announced changes last year to COS heading 14 and COS heading 37 with immediate effect.

It is widely expected that if or when the new list is finally published, there will be further restrictions to VAT recovery on agency staff, with the possible removal of COS heading 69.  Also, COS heading 52 is rumoured to be clearly worded to restrict VAT recovery to a limited range of advisory services only.

This puts the NHS VAT regime more in line with other Crown bodies.  Other speculation (although not confirmed) is that partial recovery of services such as quantity surveyors and architects would be in line with the proportion of VAT recovery on related capital projects.

We liaise constantly with HMRC regarding NHS VAT matters and can confirm that there is currently no date set for these changes to take effect.  Any suggested dates for the implementation of these new rules is pure speculation at this point and HMRC expect that there is likely to be a notice period to allow NHS bodies to budget for the changes.

There is no need to act at present with regard to these potential changes as they will not affect budgets immediately.  Going forward, it may be prudent to allow a contingency for the possible non-recovery of VAT on these headings.  Until the direction is published NHS bodies should continue to apply the headings currently in force.