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.
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 a real 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.
Claims must be made by 1 March 2009 however at present, HMRC are withholding such claims by the NHS until further guidance is obtained by the Policy Branch. We are currently in the process of formulating and submitting claims of behalf of our clients and would urge other NHS organisations to contact us at the earliest opportunity to discuss potential claims.
The House of Lords has delivered its judgement on the legality of the three-year cap on VAT refunds.
The Conde Nast and Fleming judgement states that when the three-year time limit for VAT claims was introduced back in 1996, HMRC should have allowed an adequate transitional period for retrospective refunds to be made. Furthermore, the retroactive transitional period announced by way of business briefs a few years later has now been judged unacceptable.
This landmark decision means that VAT refunds accrued but not claimed for periods before 1996 right the way back to when VAT was introduced in 1973 are now repayable. HMRC are likely to act quickly to introduce an adequate transitional period for claims to be submitted. This makes it important for claims to be considered at the earliest opportunity.
Potential for the NHS
This issue represents a real opportunity for NHS organisations to submit claims in relation to business activities, where previous claims were either not made or were stopped by HMRC due to the cap. This is likely to be more relevant for Trusts which have the same VAT registration number now as they had prior to 4 December 1996. This will be the case for many Trusts that were originally formed in the early 1990s. Contracted-out service VAT claims would not be valid as these form part of Government funding and subject to an annual cut-off.
VAT refunds for earlier periods are likely to be more difficult to prove due to lack of adequate records, restructuring of NHS entities, changes in VAT registrations, etc.
We would therefore urge NHS organisations to contact us at the earliest opportunity to discuss potential claims. HMRC are yet to respond to the judgement, but we will inform you of their response as soon as this becomes available.
In our last newsletter, we provided definitive guidance agreed with HMRC regarding VAT recovery on agency staff.
In particular, HMRC had ruled that VAT on nursing services and nursing staff either provided by a nursing principal or nursing agency could be recovered under COS heading 41 provided the nurses were ‘qualified’ nursing grades, i.e., grades D to I or band 5 and above.
HMRC have since confirmed that the Policy Team is now formally reviewing heading 41with a view to determining (once & for all) what staff fall within this heading.
They have agreed exceptionally, while the review is in progress that 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.
This information was provided to us in advance of HMRC’s next NHS newsletter due in February /March 2008 which will confirm the latest position regarding this heading.