Georgia Henry, Author at CRSTAX

HM Revenue & Customs (HMRC) has now published the second ‘wave’ of the revised single book of COS VAT guidance for Government departments and NHS bodies, following the review of interpretation of the rules. This has gone live on GOV.UK.

The external link which takes you directly to the Contracted Out Services guidance is http://www.hmrc.gov.uk/manuals/vatgpbmanual/VATGPB9700.htm or to access via GOV.UK go to the Revenue & Customs page > VAT > scroll down to VAT manuals > select ‘get manuals from the HMRC website > select ‘G’ > Government and public bodies > VATGPB9000 > VATGPB9700.

Although there seem to be some changes to the interpretation of several headings, HMRC has stressed that there are no policy changes, which means the guidance is simply a statement of the current rules as they stand.

There is therefore no set date from which the rules apply, 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.

On first reading the new guidance, notable points are:

COS Heading 28 – Interpretation and translation services

This covers interpretation of documents. It also includes simultaneous translation services. For example in person, at events/meetings/interviews, via telecommunication media, etc. Furthermore, it includes situations where an interpreter is needed during the course of treatment of an NHS patient, and where sign language services are provided.

COS Heading 40 – Messenger, portering and reception services

This heading covers messenger, portering and reception services. It includes collection and distribution of internal mail by a private company, patient appointment/reminder services, portering services such as the movement of patients and equipment around hospitals; and movement of corpses by funeral directors to or from the hospital site. It excludes the hire of telephone equipment/telephone lines or switchboard equipment alone, and the hire of agency staff to supplement in-house services during peak times or to cover leave.

COS Heading 47 – Passenger transport services

This heading includes:

Taxi firms that supply taxis to staff on request provided the government department or health authority has entered into a contract with the firm and receives a tax invoice, e.g. late night car services;

chauffeur driven cars provided the government department or health authority has entered into a contract with the firm and receives a tax invoice;

services of an outside contractor to transport passengers/patients; and

where a hospital hires or leases a vehicle with a driver for transporting in-patients, outpatients, hospital staff or other individuals (e.g. private specialists/consultants), providing it is in connection with the non-business activity of the provision of NHS health care.

It has also been noted that the hire or lease of a vehicle without a driver would not be covered under this Heading, but may be eligible for a refund under Heading 26.

On the other hand, this heading excludes:

public transport costs (as these are already zero-rated),

road tax,

passenger insurance,

staff members hailing cabs in the street or picking up a taxi from a taxi rank, and

Passenger transport services used for the transport of private patients or for a consultant providing health care to a private patient would not be eligible for a refund as it would be in connection with an exempt business activity and the normal VAT rules would apply

We understand from HMRC that there are still several headings where technical discussions are still taking place with the policy team and other experts, including definitions within COS headings 14 and 31. We would also expect confirmation of the inclusion of the updated COS Heading 25.

There are other headings yet to be published where HMRC are awaiting guidance from HM Treasury, including COS headings 45 and 52. These last two are likely to be the very last to be published.

Until the revised guidance is published, HMRC has stressed that previous guidance can still be relied upon.

We’ll keep you updated as soon as further information is available.

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.

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.

HM Revenue & Customs (HMRC) has now published the first ‘wave’ of the revised single book of COS VAT guidance for Government departments and NHS bodies, following the review of interpretation of the rules. This has gone live on GOV.UK.

There is therefore no set date from which the rules apply, so NHS bodies can apply these rules retrospectively for the current (2014/15) year.

On first reading the new guidance, notable points are:

Heading 1 – Accounting, Invoicing and Related Services

This includes general record keeping, invoicing and preparation of tax returns and other related supplies and preparation of financial accounts and/or statements and accountancy advice. However, tax planning advice is specifically excluded.

This heading therefore seems to allow general tax compliance work which is used to complement in-house tax return preparation, but not specific advice. Reference is also made to the Treasury rules and NHS guidance which dissuades the use of tax avoidance schemes.

Heading 7 – Broadcast Monitoring Services

This now includes social media monitoring, for example Facebook postings, Twitter feeds, etc.

Heading 10 – Catering

This includes hire of agency staff relating to catering. It also includes vending machines when supplied as part of a catering contract.

Heading 65 – Training, Tuition or Education

This has now been clarified to include on-line training. Although most NHS bodies have claimed this VAT to-date, it is encouraging to see the guidance updated to take account of developments in technology.

There are other headings yet to be published where HMRC are awaiting guidance from HM Treasury, including COS headings 25 (relating to photocopiers/multi-function equipment), 45 and 52. These last two are likely to be the very last to be published.

Until the revised guidance is published, HMRC has stressed that previous guidance can still be relied upon.

All in all, there are likely to be four ‘waves’ of publication according to HMRC. We’ll keep you updated as soon as further information is available.

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.

In our October 2013 newsletter, we reported that HMRC is undertaking an investigation in to a number of VAT schemes used by NHS Trusts, which involve the hire of locum doctors and other staff on short-term employment contracts that fall outside the scope of VAT.

HMRC’s Director-General for Business Tax, Jim Harra, has confirmed that this review is still in progress, but that by the end of the current financial year, HMRC will have ‘(tackled) cases that we believe are not operating VAT correctly’.

In his evidence before a recent hearing of Parliament’s Public Accounts Committee, Mr. Harra stated that HMRC has concerns about how these schemes work in practice, and that, where a locum becomes an employee of the NHS, it has to take on the responsibilities of an employer.

Responding to a question from the Committee’s Chair, Margaret Hodge, about one type of scheme, Mr. Harra noted that in some instances, employment contracts could last as little as a day. He went on to state that this was ‘clearly not how the scheme was described to us’, and that it was ‘not the basis on which we originally gave our view about its VAT treatment’. In light of this, HMRC would ‘reserve our right to challenge’ the VAT treatment being applied, following the conclusion of its investigation.

The transcript of the hearing is now available on the Public Accounts Committee website, and we would also be happy to provide a copy, if preferred. We will of course keep you updated as HMRC’s investigation progresses.

The HFMA has now published the minutes of the September 2013 meeting of its VAT technical sub-committee, attended by representatives of the VAT profession, HMRC and NHS Trusts.

No new VAT developments were announced, but the Committee did discuss several proposed changes to the NHS VAT rules, including the following;

a ‘Framework’ agreement for the calculation of business activity and partial exemption VAT adjustments by NHS bodies;
options for the VAT treatment of leased cars supplied to NHS employees (with the Committee preferring an option under which a 30% ‘block’ would be applied to VAT incurred on lease car costs, but no output VAT would be due on salary deductions);
a four-year ‘cap’ for recovery of VAT incurred on contracted-out services (‘COS VAT’).

The four-year cap proposal is intended to address a perceived disparity in the VAT rules applying to local authorities and to the NHS. At present, HMRC can issue assessments for COS VAT which has been over-recovered within the previous four years, but NHS organisations have only until 7th July following the end of a financial year to recover COS VAT incurred in that year. The Treasury is presently considering the implementation of a four-year cap as part of a wider review of Section 41 of the VAT Act 1994, which applies to government departments and NHS bodies.

The VAT treatment of leased cars has been under review by HMRC for some time, and options were discussed by the Committee. HMRC will review any feedback received in response to these options before making a final decision on which one should be implemented.

Regarding the Framework agreement, work has also been taking place for some time within HMRC, and with NHS representatives and the HFMA, on identifying suitable methods for calculating business activity and partial exemption adjustments. The agreement will be discussed in further detail at the HFMA’s ‘Tax Matters’ seminar on 6th November 2013, at which the representatives from HMRC may be able to provide further guidance on how the agreement will be applied. Representatives from CRS VAT will also be in attendance, and we look forward to seeing you on the day.

Another recent development is the launch of a consultation exercise by the EU Commission on the future of EU VAT rules for public sector bodies and activities in the public interest. As part of this exercise, the Commission has published a consultation document which sets out what it sees as the main issues, namely;

possible distortion of competition between public and private sector organisations, due to differential taxation;
complexity and lack of harmonisation, for example, difficulties in determining which supplies are taxable, exempt or outside the scope of VAT, and the disparity of EU and domestic legal provisions regarding terms such as ‘public authority’ and ‘body governed by public law’.

NHS organisations are treated as ‘public bodies’ under UK VAT law, and the possible distortion of competition between public and private sector bodies in the healthcare sector has already been the subject of a report by NHS regulator ‘Monitor’, published in March 2013. The report highlighted the differential VAT treatment of NHS organisations and charities bidding to provide NHS services, and recommended that these charities should also be entitled to claim VAT rebates.

This recommendation is echoed in one of the Commission’s options for reform, which involves the setting-up of a refund system at EU level. This would refund input VAT in respect of non-business and VAT-exempt activities, for both public bodies and private organisations carrying out activities in the public interest.

Another reform option suggested by the Commission is the elimination of special rules for public bodies, so that activities would be taxed or exempted according to their nature, and not according to the status of the body carrying them on.

The consultation document lists a number of questions which the Commission has invited interested parties to respond to, e.g. how they evaluate the existing rules, and what feedback they have on the suggested reform options. The deadline for the submission of responses is 14th February 2014.

The Commission first identified issues with the VAT rules for public sector bodies and activities in the public interest in its ‘Green Paper on the Future of VAT’ published in December 2010. It may therefore be some time before any changes recommended by the Commission are adopted by Member States, and in the UK, some of these changes may be pre-empted by the Treasury’s review of Section 41 of the VAT Act. We will issue another update when there are further developments.