In our January VAT update, we wrote about the House of Lords judgement in the cases Conde Nast and Fleming, which obliged HMRC to now repay VAT refunds accrued but not claimed for periods before 1996 right the way back to when VAT was introduced in 1973.
HMRC have since confirmed that this relates to underclaimed input tax and overpaid output tax. This represents an opportunity for NHS organisations to submit claims in areas such as private patient drugs (input tax) or cold take-away food (output tax) for these periods. Other areas are likely to be limited.
Realistically, due to the time lapsed and constant restructuring of the NHS over the years there are several ‘hoops’ to jump through in order to prove that a valid claim exists. There is however certainly scope for NHS bodies to submit claims and the potential values are likely to be higher for acute Trusts which traditionally have more business income.
This is something that CRS VAT Consulting is doing for all of our clients but we would be happy to hear from other interested NHS bodies with a view to submitting a claim on your behalf.
HMRC accept that any claim will be based upon estimating/extrapolating more recent accounts information. We have a range of methodologies and practices in place to extract the relevant information and formulate a realistic claim.
All claims need to be lodged with HMRC by the end of March 2009, so please contact us as soon as possible.
NHS bodies or their charitable trustees often embark upon fundraising events. The VAT treatment of these events is an area which can often cause confusion and there are some circumstances where VAT exemption is appropriate for supplies but this is not always the case.
Generally, VAT exemption only applies to those events which are promoted as being held primarily to raise funds. The exemption does not extend to regular trading activities but covers a variety of events such as a ball, annual lunch or dinner dance, etc. For example, an event of the same kind held 15 times or more in a year in the same location does not qualify for VAT exemption.
Charity ‘challenge’ events such as walking, cycling and other sponsored events to raise funds are likely to be affected by recent changes announced by HMRC. The types of events which are affected include those which are arranged to include travel and accommodation and require the participants to raise a minimum figure in order to participate. Although the changes took place on 31 July 2008, where events have been publicised or contracts have been entered into before this date the old rules should still apply.
Fund raising events that include a package of both travel and accommodation or more than 2 night’s accommodation do not qualify for the fund-raising exemption and are therefore subject to VAT.
Please contact us for further details if you think that this affects your NHS body.
‘Imminent’ Changes
The current Treasury Direction on COS VAT recovery has not changed since December 2002, however HM Treasury has been conducting a ‘review’ of the list for at least a year. In advance of any revised Direction being published which has been ‘imminent’ for some time now, HMRC announced changes last year to COS heading 14 and COS heading 37.
It is widely expected that when the new list is finally published, there will be further restrictions to VAT recovery on agency staff (COS heading 69) and professional services (COS heading 52). In particular, COS heading 52 is rumoured to be clearly worded to restrict VAT recovery to a limited range of ‘advisory’ services only.
Until the direction is published, NHS bodies should continue to apply the headings and HMRC interpretations currently in force.
COS Heading 41
Further to previous newsletters, HMRC and HM Treasury are currently reviewing heading 41 with a view to determining (once & for all) which staff fall within this heading. While the review is in progress, NHS bodies may continue to recover VAT on nurses, nursing auxiliaries, and nursing/healthcare assistants.
This represents a slight widening of the previous ruling in that VAT recovery can be extended to non-qualified nurses/healthcare assistants as well as qualified nursing grades.
If NHS bodies have previously restricted recovery or had VAT disallowed by HMRC for these services, you may recover the restricted VAT on the next appropriate VAT return. Remember that corrections to COS VAT incurred in the 2007/08 financial year must be claimed before the end of June 2008.
For the financial year 2007/08, net COS recovery corrections of £10,000 or more in any 3 month period required submission to HMRC for prior approval, together with copies of invoices where VAT corrections exceed £500.00.
This disclosure requirement has been removed for periods commencing 1 April 2008 but may be reinstated in the future.
The March 2008 Budget increased the £2,000 voluntary disclosure de-minimis limit for errors to the greater of £10,000 or 1% of turnover, subject to an upper limit of £50,000 of VAT. For adjustments above £10,000, the limit for correcting errors on the next return is calculated by reference to the net turnover for the return period.
For the NHS, the net turnover is the total business turnover (taxable and exempt) only, as should be declared in Box 6 of the VAT return. The turnover figure should not include non-business healthcare funding and this funding should not be shown in Box 6.
HMRC have stated that these revised changes will not apply to annual Business Activities reviews or annual Partial Exemption calculations as these are not strictly corrections of errors. This is because the practice of calculating business input tax and partial exemption liabilities annually rather than monthly is a concession allowed by HMRC.
The current procedure adopted by NHS bodies and accepted by HMRC for correcting errors is to enter any overclaim or payment in Box 1 of the VAT return and any underclaim or repayment in Box 4.
This is incorrect, since Box 1 should only be used to account for additional output tax due. It should not be used for example to repay overclaimed COS VAT.
In future, VAT adjustments should be made in the following way:
- Underpaid output tax is declared in Box 1
- Underclaimed business input tax is declared in Box 4 and section 1 of the Form VAT 21
- Underclaimed COS VAT is added to the appropriate COS heading in section 2 of the Form VAT 21
- Overclaimed COS VAT is deducted from the appropriate COS heading in section 2 of the Form VAT 21
If a partial exemption repayment is due (of previously claimed COS VAT), it may not be possible to identify the individual COS headings to be adjusted. In these cases, the total amount due for repayment can be shown as a negative amount on Form VAT 21 under COS heading 100.
It has always been a requirement that anyone submitting a VAT claim or other representation to HMRC on behalf of an NHS body must present evidence that they have authority to make such representation.
CRS VAT Consulting has always adopted the practice of asking our clients to sign authorisations specific to the claim being made. HMRC have now emphasised that this practice is correct and they will not accept ‘blanket’ authorisations.
Furthermore, they have tightened up this requirement and have stated that authorisations must be original (i.e. photocopies or faxes are no longer acceptable), of a current date, on headed notepaper and signed by a ‘responsible’ member of the NHS body. These must also include their position and a contact telephone number, with the nature of the representation quoted in the authorisation.
For VAT purposes, GPs remain outside of the NHS Divisional VAT Registrations for England, Scotland and Wales. This means that if a supply is made to a GP and an NHS body merely pays for the goods or services on behalf of a GP, then the supply is not being made to the NHS body and VAT will not be eligible for recovery by the NHS body under COS.
If however the responsibility lies with the NHS body to secure the service in question, e.g., the collection of clinical waste or IT infrastructure and it is the NHS body which has entered into the contract and pays for the service, then the supply is being made to the NHS body and VAT can be recovered under COS.
HMRC have re-emphasised the requirement to determine any business and non-business apportionment of the VAT on capital schemes. Once this has been done, the non-business portion of the scheme can be considered under COS rules in the normal way.
The effect of this is could mean an increase in VAT recovery where the scheme is associated with taxable income generation, or a decrease in VAT recovery where exempt income is generated. It could also mean that not all of the professional fees incurred will be eligible for COS VAT recovery under Heading 52 – only that percentage of the fees that relate to the non-business portion of the scheme. This would however need to be taken into account in the annual partial exemption adjustment so that VAT recovery on COS is not restricted twice.
By concession, HMRC currently allow certain supplies of temporary workers by employment agencies to exclude the wages element when charging VAT, i.e. VAT is only due on the commission. It was announced in the March 2008 Budget that this concession will be withdrawn from 1 April 2009.
This will have the effect of further increasing irrecoverable VAT for the NHS on supplies of agency staff that are not eligible for COS VAT recovery.