Our newsletter dated 12^th June 2014 explained that HM Revenue & Customs (HMRC) had informed the NHS 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.

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 approved 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.

A relaxation of the rules followed and temporarily, NHS bodies were able to continue to recover COS VAT at the time an invoice was paid, irrespective of the tax point date.

HMRC has now re-iterated the proper tax point rules in their letter dated 29^th July 2015 and clarified that COS VAT should be claimed in the VAT accounting period when the tax becomes chargeable (normally the time of the supply, or tax-point).  HMRC has acknowledged that ‘it may present difficulties where claims have been made based on the date of payment, resulting in a possible a need to make changes to accounting systems and processes’. In such circumstances HMRC will allow an extension of time up to 31 March 2016 for NHS bodies to make necessary changes; but after this time claims must be made when the VAT in question becomes chargeable.

We would therefore recommend that the tax point rules are adopted as soon as possible. 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 2014/15 financial year must be claimed by the 31 July 2015 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.

As part of the ongoing review of the COS VAT guidance, HM Revenue & Customs (HMRC) has advised us that the next batch of COS guidance will confirm that VAT incurred on the hire, lease or rental of multifunctional devices which serve as printers, photocopiers and faxes is eligible for recovery under COS Heading 25.  This is following consultation with HM Treasury on the definition of this heading.  This is welcome news as it is a further example of the COS guidance being updated to take account of developments in technology.

Historically, this heading was restricted to photocopiers only.  NHS bodies should ensure that any VAT incurred on such contracts during the 2014/15 financial year is recovered on a VAT return before the 31st July 2015.