Currently, some employment bereaux (typically referred to as agencies) which provide staff to the NHS act as ‘principals’, charging VAT on the whole supply, whereas others act as ‘agents’, only charging VAT on the commission element.

As stated above, VAT on nursing and admin staff is generally considered recoverable in either case, however bereaux which act as principals for the supply of doctors/locums create a higher VAT cost to their NHS clients in light of HMRC’s rules.

We have recently become aware that HMRC are now challenging the ‘agency’ treatment of some employment bereaux providing doctors/locums, stating that they should be accounting for VAT on the whole supply.  This dispute is due to be heard in the VAT Tribunal.

If HMRC succeed, it could mean that all doctors/locums bereaux will be forced to account for VAT on the whole of their supply, further burdening the NHS with non-recoverable VAT.  We will keep you posted with developments.

HMRC issued ‘new’ guidance last April regarding VAT recovery on agency fees.  We included this guidance in a VAT update which was sent to all of our clients.

The guidance stated that VAT on agency commission fees for nurses can be recovered under COS heading 41 and VAT on agency fees for secretarial, telephone and clerical staff, IT staff, etc can continue to be recovered under COS heading 69.  Accounting services can continue to be recovered under COS heading 1.

VAT on pure staff secondments and agency fees for medical staff other than nurses cannot however be recovered under any COS heading.  This is generally doctors/locum services but also relates to other medical staff such as radiologists, pharmacists, pathologists, etc.

Up until this guidance was issued, NHS organisations had always recovered the VAT on all agency staff irrespective of whether they were nurses or doctors, with the full knowledge of HMRC.

We would like to reiterate our advice to any Trust that has misunderstood the guidance or where it has not been disseminated to accounts payable staff to cease recovering the VAT on doctors/locum agency fees.

Following consultation with the DoH and HM Treasury, Customs have now published revised guidance on the scope for VAT recovery under these two headings.

This follows uncertainty about whether VAT can or cannot be recovered where property related supplies are involved.

Heading 45

Heading 45 is for the operation of hospitals, healthcare establishments and healthcare facilities and the provision of any related services.

Customs have now clarified that if these types of facilities are provided under a PFI or LIFT arrangement, VAT will be recoverable irrespective of the level of associated services, i.e., PFI or LIFT arrangements which are similar to a ‘bare’ commercial lease will be eligible for VAT recovery.

If however, the facilities are provided under arrangements which are not strictly PFI or LIFT, then they must include a full package of services necessary for the ‘operation’ of the facility for VAT to be recovered. This should be the core services of cleaning, maintenance, security, etc.

If there is a minimal level of services, no VAT will be recoverable unless the services are separate from the lease, in which case VAT can be recovered on the services only and not the lease.

Heading 53

Heading 53 is for the provision under a PFI agreement of accommodation for office or other governmental use, together with management or other services in connection with that accommodation.

In the past Customs have generally allowed VAT recovery on leased accommodation which is ‘similar’ to a PFI arrangement. In this context, ‘similar’ was taken to mean serviced or managed accommodation.

In the latest guidance, Customs now state that VAT is recoverable under heading 53 only on PFI arrangements with a lease of serviced or managed accommodation. VAT is not recoverable under heading 53 on PFI arrangements with no services nor is it recoverable on non-PFI arrangements, unless the services are separate from the lease, in which case VAT can be recovered on the services only and not the lease.

Transitional Period

If an NHS body has been recovering VAT on an existing agreement without Customs’ approval and the agreement does not meet the above criteria, continued VAT recovery will be allowed until 31 March 2006.

If however you have been recovering VAT on an existing agreement which does meet the above criteria, VAT can be recovered until the end of the lease.

Finally, VAT recovery on any pending or proposed contracts will only be allowed if they meet the above criteria.

Customs have published a Business Brief (13/05 note 4) relating to the VAT Tribunal’s decision in the case of University Court of the University of Glasgow.

In this case, the Tribunal considered whether arrangements for the University to provide medically-registered staff to work at NHS Trusts was a supply of staff (taxable at the standard-rate) or a supply of medical care (exempt from VAT). On the balance of the facts, the Tribunal concluded that the supplies in question were taxable supplies of staff.

This case does not establish any new principles of VAT law in that pure supplies of staff which come under the direction of the party receiving the supply are always taxable no matter what duties they perform. Where an employer provides the ‘services’ of its staff, the VAT liability follows the nature of the services, e.g. exempt medical services or standard-rated accounting or admin services, etc.

The crucial issue for the NHS is that Customs went on to confirm in their Business Brief that VAT incurred on supplies of staff cannot generally be recovered under the Contracted-out services direction.

VAT recovery under the contracted-out services direction is only allowed on the ‘services’ of staff (e.g. typing, secretarial, admin, accounting, nursing, etc) and not the pure supplies of staff.

It would therefore be prudent to review the contractual arrangements for supplies of medical or non-medical staff (e.g. secondments), to see whether VAT will now be due in light of this decision and whether it is eligible for recovery. It would also be prudent to review supplies made by the NHS to consider whether output tax should be charged.

Following a recent ECJ ruling, NHS bodies may now have the opportunity to recover a higher proportion of VAT at the outset on capital schemes which have a mixture of business and non-business use.

The decision which has been accepted by Customs allows a VAT registered body which has both business and non-business activities to reclaim all the VAT ‘up front’ where some business use is made and then account for VAT on the non-business use of the asset over the economic lifecycle (as opposed to apportioning the VAT incurred between business and non-business use). This is known as the ‘Lennartz’ principle.

Customs have announced in Business Brief 15/05 that they would require the output tax charged under the Lennartz principle to be calculated over a maximum 20 year period based on straight line depreciation.

The scope for VAT recovery applies to schemes commenced from the date of Customs’ Business Brief (9 August 2005). There may also be additional scope to retrospectively claim VAT on schemes commenced since 9 April 2003 provided the claim is made by 9 February 2006.

Customs & Excise have recently announced that placing direct advertisements in newspapers, magazines, etc. is not eligible for VAT recovery under the contracted-out services rules. Although Customs insist that this is simply clarification of existing rules, it will be news to most NHS organisations that have always recovered VAT on these services.

Customs have however stated that the provision of advertising is still eligible for recovery under item 57 of the COS headings if provided as part of a package of services by a third party.

To clarify, we have confirmed with Customs that using the services of an advertising agency does still qualify for VAT recovery.

Since December 2002, heading 53 of the contracted-out services list has stated that VAT is recoverable on the ‘provision under a PFI agreement of accommodation for office or other governmental use, together with management or other services in connection with that accommodation’.

Customs NHS policy unit are however still considering the circumstances under which NHS organisations can recover VAT on leased accommodation.

Since this heading came into force, it is our understanding that VAT on leased accommodation which is ‘similar’ to a PFI agreement is also recoverable. In this context, similar to a PFI agreement means that NHS organisations simply occupy accommodation and all the services relating to the building are provided by the ‘landlord’ under a single supply agreement.

Customs’ Business Brief 18/03 published in September 2003 describes ‘Composite Trade’ and ‘LIFT’ arrangements as being PFI arrangements which are eligible for VAT recovery subject to the usual conditions. This is on the basis that these are also ‘similar’ to PFI.

This wider interpretation of heading 53 is still being reviewed by Customs NHS policy branch and there is likely to be further clarification and guidance in the future. In the meantime, if your NHS organisation is occupying or is intended to occupy leased accommodation, there may be scope for VAT recovery. There is however no blanket approval to recover VAT on leased accommodation either as part of PFI, LIFT, Composite Trade or otherwise. We would therefore ask that you seek our advice before any VAT is recovered.

Customs will shortly be issuing further guidance regarding the attribution of costs when calculating VAT recovery on business activities. This is following concerns that direct attribution is only being done to a limited extent which possibly results in over recovery of VAT which relates wholly to non-business healthcare activities.

We have therefore been working very closely with Customs recently in order to ensure that our working methods for business and partial exemption reviews are acceptable. As such, we have developed a range of improved analysis techniques which aim to maximise direct and indirect input tax recovery and minimise partial exemption exposure and at the same time are considered ‘fair & reasonable’ by Customs.

This does however mean that we ask our clients for a bit more information than before to complete these reviews, however we can demonstrate the value of this by identifying more accurate VAT savings which are agreed by Customs. Furthermore, we continue to carry out ‘re-reviews’ of business and partial exemption where a review has already been carried out by previous VAT advisers and to-date we have identified in excess of £1.25M of additional savings. Proof that not all VAT advisers are the same!

Under current published guidelines, VAT recovery percentages calculated on capital schemes below £500K in value (excluding VAT) do not need Customs’ prior approval, however sufficient evidence and working papers must be kept available to justify VAT recovery should Customs require this.

Also at present, the ‘banding options’ can be used for schemes up to £15m in value before prior approval is required, (although the bandings are generally thought to be less advantageous in most cases). Any VAT recovery on capital schemes sought outside of these guidelines requires prior agreement.

Customs will soon be publishing revised guidance, believed to come into effect from April 2005, whereby Trusts will be required to seek prior approval to recover VAT on any capital scheme where the potential VAT recovery is likely to exceed £50,000. This is irrespective of whether the banding option is used, or whether the VAT recovery is based upon a detailed review of costs. Furthermore, Customs will be generally ‘tightening up’ VAT recovery on schemes. For example, where VAT recovery is sought based upon a review of costs, more detail will be required on larger items such as mechanical costs.

These rules apply equally where Trusts determine VAT recovery themselves or where they appoint the services of VAT advisers.

The general rules on VAT recovery also apply stringently to schemes reviewed under the ‘free’ Procure21 service, where no ‘special arrangements’ or advantageous terms have been agreed with Customs.

With effect from 1 August 2004, legislation has been introduced to require VAT registered traders to notify Customs if they use schemes that Customs deem to be ‘VAT Avoidance’.

The legislation is intended to dissuade the creation and use of ‘contrived’ and elaborate schemes, whose main purpose is to avoid tax. The requirement to notify Customs will provide them with information in order to take counter action where appropriate.

There are two types of areas that Customs are targeting, these are ‘Designated avoidance schemes’ and ‘Hallmark schemes’. Customs have published a list of 8 designated schemes the use of which must be disclosed to Customs. A hallmark scheme is basically a transaction or number of transactions entered into which has, as one of its main purposes the intention to achieve a tax advantage.

Customs have also published the hallmarks of such schemes.

There are heavy penalties for traders who fail to notify Customs when they use such schemes, however as with other VAT penalties, these cannot currently be directly levied on NHS bodies. Trusts should however still be aware that certain transactions with non-NHS third parties may still come under scrutiny. It should also be pointed out that NHS bodies have in the past been specifically warned against using avoidance schemes by the DoH and HM Treasury.

Finally, the legislation is NOT intended to dissuade traders or NHS bodies from reviewing bona-fide transactions in order to ensure that you gain the correct tax advantage, (e.g. PFI arrangements, property transactions, business reviews, COS reviews, etc).

If you would like more detailed information on the legislation or are in any doubt about arrangements entered into or being suggested for your NHS organisation, please let us know at the earliest opportunity.