HM Revenue & Customs (HMRC) has now confirmed in a new letter issued to NHS Trusts that it does not intend to raise assessments to claw back VAT said to have been over-recovered under COS heading 69 in periods prior to 1st April 2014.  This is following the previous letter issued in February 2014, which clarified that heading 69 did not allow for the recovery of VAT on supplies of clerical or administrative staff provided by employment agencies. Heading 69 was only meant to allow for the recovery of VAT on outsourced typing, secretarial, telephonist or clerical services, by a supplier which uses its own staff or agency staff, who are under the direction of the supplier/agency.

HMRC’s February 2014 letter stated that the revised interpretation was effective from 1 April 2014, but they did not rule out the possibility of applying the clarification retrospectively.  NHS bodies had historically been allowed to reclaim VAT incurred on certain grades of clerical and administrative staff provided by agencies.  Although this has been described as a ‘misunderstanding’ by HMRC, the previous published guidance, newsletters and actions of visiting HMRC officers clearly allowed this heading to be interpreted in this way.  It is therefore not entirely surprising that following a review, HMRC has now decided not to assess years up to and including 31 March 2014.

HMRC state that they may still pursue inaccuracies up to 31 March 2014 and for subsequent years should it be discovered that NHS bodies have claimed VAT recovery outside of the job roles indicated in the heading in respect of supplies of staff or of services.

The First Tier Tribunal (FTT) has published its findings in respect of North Lincolnshire and Goole NHS Foundation Trust appeal.

This is encouraging news for NHS Trusts which still have outstanding ‘Fleming’ VAT claims which are dependent upon HMRC accepting ‘entitlement’.

We submitted claims to HMRC on our client’s behalf back in 2009, for various types of overpaid or under recovered VAT dating as far back as 1973. This was following the judgment of the House of Lords in the joined cases of Fleming/Condé Nast in 2008, which found that the way HMRC introduced the capping provisions (back in 1996 and 1997) had been unlawful at the time. These were commonly referred to as the ‘Fleming claims’.

Some of these claims have already been paid in part, in particular those for overpaid catering output tax, but only where HMRC agreed the quantum of the claim and the entitlement from the date of the Trust formation.

Claims for earlier periods were rejected on the grounds that HMRC did not believe the entitlement for earlier periods relating to predecessor NHS bodes was transferred to the Trusts.

Other types of claims were rejected in full, in particular, those for input VAT on drugs and prostheses supplied to private patients, (referred to as Wellington/BUPA VAT claims). This was following the Nuffield FTT decision in 2013 where HMRC’s argument that these claims were invalid was upheld. The Nuffield appeal was the lead case for all appeals against HMRC’s rejection of the drugs and prostheses claims, including NHS appeals.

The North Lincoln and Goole case was the lead case dealing with the question of whether there was a transfer of rights to VAT claims from predecessor bodies to the current NHS Trust.

Therefore, any Trust with an outstanding claim which is dependent upon the entitlement issue could now receive a further VAT refund.

HMRC could still seek to argue that this does not set a precedent, but we will let you know as soon as HMRC’s view of the decision to the wider NHS becomes known. If HMRC does now agree that this decision has wider application for the NHS, we will make arrangements to agree the quantum of the claims now due to our clients.

As most NHS bodies are aware, HM Revenue & Customs (HMRC) has been actively reviewing the interpretation of the Treasury Direction COS VAT guidance.  This is following the aborted attempt earlier this year to impose the more restrictive Government Department (GD) rules on the NHS.  At the time, HMRC was forced to back down and instead consult with the NHS before making any changes.

It was originally anticipated that the revised guidance following the consultation would be part-published in November 2014 incorporating both GD and NHS bodies, however, we have now been informed that the publication date has been put back to mid-January 2015.

Specific items which could be subject to change include:

COS Heading 52 – Professional Services

This is likely to be restricted to ‘advice’ or ‘opinion’ only.  NHS bodies may no longer be able to recover VAT on consultancy costs for implementing changes, including legal representation or professional fees related to capital projects.

COS Heading 31 – Laboratory Services

Following the GSTS Tribunal decision earlier this year that pathology testing involving patient samples is exempt from VAT, the scope of this heading is being reviewed.  This may mean that VAT charged on outsourced laboratory facilities (including equipment, management, reagents, maintenance, training, etc.) may no longer be eligible for recovery under this heading.

COS Heading 45 – Healthcare Facilities

In a letter recently issued to the HFMA, HMRC implied that a ‘healthcare facility’ was a physical building, unit or area within a building which is run/operated by the contractor which enabled the NHS body to occupy the facility to deliver healthcare.  This definition would mean that COS heading 45 would still cover PFI hospitals and other similar facilities, but may well exclude managed facility contracts which are heavily based upon the provision and availability of equipment and consumables.
Other areas potentially subject to change include:

COS Heading 10 – Catering Services

This may now be extended to supplies of catering staff.

COS Heading 14 – Computer Services

This may exclude private data lines, which were specifically included in the previous NHS guidance.

Our initial thoughts are that the anticipated changes will significantly restrict the scope for VAT recovery of NHS bodies, many of which are already in serious financial difficulty.  We will issue a further update once we have more information.

HM Revenue & Customs (HMRC) issued a letter to the NHS in December 2013 stating that the proper tax point (time of supply) rules should be applied to Contracted-out services (COS) VAT recovery.  This meant that COS VAT should be claimed on the VAT return for the period in which the invoice is dated, or by the annual deadline at the latest.  In the same letter, the annual COS deadline was extended a further month to 31 July.

Historically, NHS bodies have recovered COS VAT on a return relating to either the period in which the invoice is dated (registration), the period the invoice was approval for payment, or the period in which the invoice is paid.  This has meant that if an invoice is in dispute, the VAT may not have be claimed until several months or even years after the tax point date.

Following various representations made about the timing of HMRC’s proposed changes and the lack of any transitional period, HMRC has now ‘relaxed’ this tax point rule for the time being.  This means that NHS bodies can continue to recover COS VAT at the time an invoice is paid, irrespective of the tax point date.

HMRC has told us that as part of the ongoing review of NHS and Government VAT following the recent publication of interim guidance, further guidance will be issued in the coming months making it compulsory for the NHS to adopt the tax point rules, with a likely start date from April 2015.

We would therefore recommend that the tax point rules are adopted as soon as possible, to ensure that COS VAT on invoices dated prior to April 2014 but not yet approved or paid is not lost.  Any NHS body which has already adopted the tax point rules should continue to use this method.

In summary, at present any COS VAT incurred on invoices paid within the 2013/14 financial year must be claimed by the 31 July 2014 deadline irrespective of the tax point.  Going forward, it is recommended to adopt the tax point rules as soon as possible to avoid any potential loss of VAT recovery.