NHS bodies have historically recovered VAT on all agency staff with the full knowledge of HMRC, however as outlined in our previous news bulletins, they have endeavoured over the last few years to clarify and also restrict the COS headings relating to these types of supplies.

There is often confusion as to whether NHS bodies are being provided with ‘agency staff’ or ‘services’ and therefore whether the VAT on certain supplies can be recovered under the COS rules.

For the avoidance of doubt and to also correct misleading advice which you may have received from elsewhere, we have also obtained definitive guidance from HMRC on this matter and can confirm that the following is correct:

  • VAT on nursing services and nursing staff either provided by a nursing principal or nursing agency can be recovered under COS heading 41. This includes all qualified nursing staff grades.
  • VAT cannot be recovered under any COS heading on the services of any other non-nursing healthcare workers or other non-nursing healthcare staff provided by an agency, such as doctors/locums/consultants, social workers, physiotherapists, laboratory or theatre technicians, radiographers, etc.
  • VAT on office staff can generally be recovered under COS heading 69. This has not changed, the wording of the COS heading ‘including agency staff’ has been incorrectly interpreted in the past to mean all agency staff.  HMRC have confirmed that this is somewhat misleading and should only really include office staff.  The heading includes typists, secretaries, telephonists, clerical admin staff, accounts staff such as accounts payable, credit control staff, etc, IT staff such as data inputting, data analysis, uploading PC programs, etc (basically general day-to-day admin, clerical, accounts and IT office duties).  If an employment agency provides senior accountancy staff or senior IT consulting staff, this is not eligible under any COS heading.
  • VAT cannot be recovered under any COS heading on supplies of any other agency staff. Services such as catering, laboratory, laundry, library, messengers, porters, collection, delivery, passenger transport, pest control, security, etc. continue to be eligible under the various headings as contracted-out services in their own right, agency staff carrying out these functions are not eligible for recovery.
  • VAT on accountancy services such as record keeping, book keeping, financial control, credit control, preparation of financial accounts, accountancy advice, internal audit, etc can be recovered under COS heading 1. This does not include agency staff.
  • VAT on IT consultancy services can continue to be recovered under COS heading 52. If an agency provides IT consultancy staff, HMRC have recently clarified that this is not eligible for VAT recovery.
  • Services of managers, advisers, experts, specialists, consultants, etc can continue to be recovered under COS heading 52. This is generally accepted to mean where a company or other form of trading body such as a sole proprietor, partnerships, LLP, etc, provides their services.    This includes services of solicitors, architects, quantity surveyors, other professional advisers, etc.  Again, it does not include agency staff.

HM Treasury have completed their review of the COS headings and a revised direction will be issued in the very near future.  We shall publish the revised list applicable to the NHS as soon as this becomes available.  In the meantime, HMRC have given early notification to a couple of changes which will have retrospective effect back to 1 April 2006.

COS Heading 14

Due to constant changes in IT, it has been recognised that the types of IT services purchased are becoming increasingly removed from the IT services once performed in house.

The revised direction therefore replaces:

Computer services supplied to the specification of the recipient, including the provision of a fully managed and serviced computer infrastructure

with:

Computer services supplied to the specification of the recipient including:

  • the provision by one or more suppliers of a fully managed and serviced computer infrastructure either using the recipients’ own hardware or hardware provided by the supplier as part of the infrastructure; and
  • the development, delivery and support of bespoke software.

Excluding:

  • supply and support of off-the-shelf software;
  • hire of hardware alone;
  • line rental alone;
  • telephony; and
  • hire of computer consultants to add expertise to in-house IT teams.

It is hoped that this new wording makes more explicit what services and procurement arrangements are covered and the sort of services that are not.

COS Heading 37

The actual wording of the heading remains the same; ‘Maintenance, repair and cleaning of equipment, plant, vehicles and vessels;.’  HM Treasury has additionally confirmed that recovery of VAT under can be extended to equipment, plant, vehicles and vessels leased from a separate supplier to the one providing the maintenance. Recovery on this basis can be made with effect from 1st April 2006. Previously recovery was restricted to equipment, plant, vehicles and vessels owned by a department.

As outlined in our previous newsletters, there are changes to the VAT liability of certain medical services which came into place on 1 May 2007.  These affect NHS Trusts that generate non-NHS medical income from activities such as clinical trials or occupational health services.

An example is ‘post-mortem examinations and reports’ provided to coroners, which are now fully taxable.

The changes from 1 May represent a timely opportunity to correctly determine the VAT liability of all non-NHS income.

We can conduct a systematic review of all income generation streams, both debtor and cash in order to determine the correct VAT treatment.  Our work would involve talking to the relevant staff at the Trust to gain a good understanding of your income streams and reviewing a given list of financial reports, contracts, sales invoices and other supporting documentation which we would ask you to produce.

The results of this review would then be used to produce a tailored report to be used to determine the correct VAT liability to be applied to your income streams.  This can then be referred to by your staff on a regular basis to ensure that VAT is accounted for correctly on all income.

Please contact us if you are interested in having a review carried out.

We have recently had re-confirmation from HMRC of the current COS VAT recovery rules applicable patient appliances.

The term ‘patient appliances’ refers to items worn by patients such as footwear, callipers, wigs, etc and also applies to aids such as wheelchairs and walking frames.

Custom Made Items

The supply of bespoke surgical footwear or of a wheelchair or other appliance specifically designed for a particular patient is not eligible for VAT recovery as the supply is primarily of goods.

If however, the manufacturer differentiates on the invoice between the goods element and the services element of modifications and adaptations, VAT can be recovered on the services element under COS heading 37, ‘Maintenance, repair and cleaning of equipment, etc.’

Examples of modifications are:

  • Raising a sole or heel
  • Fitting bespoke straps/supports/callipers

In these circumstances, VAT can be recovered on the parts and spares elements which form a part of the service.  VAT cannot however be recovered on the main supply of the goods, (e.g. the ‘base’ shoes).

Ready Made Items

The supply of ready-made patient appliances such as standard wheelchairs or boots of various sizes is not eligible for VAT recovery as these are treated as goods only.

Maintenance & Repair

Repair services such as re-heeling or re-soling is eligible for VAT recovery under item 37, ‘Maintenance, repair and cleaning of equipment, etc.’, together with the integral goods such as the replacement soles/heels.

Orthotist/Prosthetist Session Fees

These services are exempt from VAT under item 1c, group 7, schedule 9, VAT Act 1994, therefore the suppliers should not be charging VAT on their invoices.

A ‘Memorandum of Understanding’ relating to joint staff of universities and NHS organisations has been agreed with The Department of Health, NHS Employers and the Universities and Colleges Employers Association in response to the University of Glasgow – v- HM Revenue and Customs VAT tribunal ruling.

In the University of Glasgow case released in April 2005, the VAT Tribunal concluded that there was a supply of staff from the university to the NHS which was subject to VAT. Furthermore, this VAT was not eligible for recovery by the NHS under the contracted-out services rules.

The purpose of this new memorandum is to set out the NHS and university understanding of the role of joint staff of NHS organisations and universities who are engaged in both teaching and/or research as well as the delivery of patient care.

HMRC have agreed that provided the parties operate within the context of the practices described in the Memorandum, such arrangements will be outside the scope of VAT.

As outlined in our February 2007 newsletter, there are changes to the VAT liability of certain medical services which are due to come into place on 1 May 2007.  These will affect NHS Trusts that generate non-NHS medical income from activities such as clinical trials or occupational health services.

In our experience, Trusts usually get the liability right for ‘core’ income such as staff & visitor catering, car-parking or drug sales.  Most NHS Trusts do however enter into a broad range of income generation areas where the VAT treatment may not always be considered.

The changes from 1 May represent a timely opportunity to correctly determine the VAT liability of all non-NHS income.

Getting it wrong can represent a nasty surprise if HMRC carry out an assurance visit and find that VAT has not been accounted for on certain income, potentially going back three years. Getting the liability right can however increase the potential for direct and indirect input tax recovery.

Our Review Service

We can conduct a systematic review of all income generation streams, both debtor and cash in order to determine the correct VAT treatment.  Our work would involve talking to the relevant staff at the Trust to gain a good understanding of your income streams and reviewing a given list of financial reports, contracts, sales invoices and other supporting documentation which we would ask you to produce.

The results of this review would then be used to produce a tailored report including tables and flowcharts to be used to determine the correct VAT liability to be applied to your income streams.

This can then be referred to by your staff on a regular basis to ensure that VAT is accounted for correctly on all income.

Please contact us if you are interested in having a review carried out.

The list of eligible contracted-out services published in December 2002 is currently being reviewed by HM Treasury.  No conclusions from the review have yet been published but we understand that VAT recovery in relation to professional services is due to be changed.

The perception is that the current heading 52 on the list relating to professional services is too widely drawn, resulting in NHS organisations recovering VAT on a range of services not originally intended by Treasury.  The recent ‘clarification’ regarding VAT recovery on doctors/locums fees is an example of this.

The changes will no doubt be designed to clarify the heading further which will have the effect of limiting the scope for VAT recovery.

We will provide a further update on this once the results of the review have been announced.

HMRC have concluded their review of the VAT liability of certain medical services following a consultation process and have issued Revenue & Customs Brief 06/07 detailing changes to the medical exemption.  These will come into place on 1 May 2007.

The VAT changes are likely to impact mostly upon certain commercial, non-NHS activities undertaken by GP practices, doctors and consultants as providers of affected services and; insurance companies, the legal profession, employers and the public sector as recipients of the affected services.

The statutory healthcare activities undertaken by NHS Trusts and PCTs are not affected by the new rules; these remain outside the scope of VAT.  Statutory supplies of medical records also remain outside the scope of VAT.

Non-NHS medical services by NHS organisations are however potentially affected.  If the principal purpose of the medical service is the protection, maintenance or restoration of the health of an individual then the services will continue to be exempt from VAT.

Medical services which are primarily for the purposes of enabling a third party to decide a course of action will be subject to VAT.  This appears to affect mainly items such as witness/testimony reports, medicals for certain fitness certificates and some occupational health services.

If you undertake these types of activities and require assistance in determining the correct VAT liability in light of the new rules, please contact us.

Increasingly, NHS organisations are entering into arrangements with third-party suppliers to make facilities available to those suppliers to carry out private health services from NHS premises.

The assumption seems to be that no VAT is due on income received by the NHS for supplying facilities, however when examined in more detail, these may include a mixture of supplies which may be subject to VAT.  Examples include licenses to occupy land/premises (exempt provided there has been no option to tax), staff or ‘services’ of staff (potentially standard-rated) and other ancillary supplies (utilities, cleaning, catering, consumables) which may be exempt or standard-rated depending upon the specific circumstances.  This potential VAT headache is complicated further when the facilities are provided in return for a ‘profit share’, which is not clearly defined and could potentially be fully taxable.

If you are entering into such arrangements, please contact us at the earliest opportunity to determine the correct VAT liability.

Some VAT advisers continue to be promoting retrospective business claims going back further than three-years following various judgements that some aspects of the implementation of the three-year cap (now over ten years ago), was unlawful.

Although this may be relevant to some NHS organisations, any retrospective claims are limited to the current VAT registration of the NHS entity and claims must be based upon accurate, comprehensive records.  Scope for VAT refunds beyond three years are therefore quite limited and the values are probably not worth pursuing in the majority of instances.