In a letter to the Recruitment and Employment Confederation (REC), Treasury minister Danny Alexander has warned NHS Trusts against using artificial arrangements designed to avoid paying VAT on locum staff charges.

This follows news reports about schemes used by a number of NHS Trusts, which involve the hire of locum doctors and other staff on short-term employment contracts that fall outside the scope of VAT.

According to the REC, Mr. Alexander confirmed that such contracts would only escape a VAT charge if the evidence proved that a medical professional was being directly employed by an NHS Trust, with the Trust taking on the liabilities of an employer. This evidence included the length of time that a person is engaged for, and he explained by way of example that

‘HMRC would not consider a placement for a period of one shift to be consistent with a contract of employment but, instead, would see that as indicating the agency is making a supply of staff liable to VAT.’

We understand that HMRC is undertaking an investigation into this issue and that it anticipates briefing members of Parliament’s Public Accounts Committee in the next few weeks.

If your Trust is one of those that use these schemes, or if you would like further information about the VAT rules which apply to supplies of staff, please do not hesitate to contact us.

The VAT treatment of locum medical staff has also been recently examined in the case of Rapid Sequence Ltd v. HMRC, which was heard before the First-tier Tax Tribunal (FTT).

Rapid Sequence Ltd (the Company) was an employment business supplying locum doctors to NHS Trusts as a principal. The locum doctors operated either as self-employed individuals or through personal service companies, and were paid an agreed hourly rate by the Company, which in turn received payment from NHS Trusts for the provision of the locums’ services. The FTT had to determine whether the Company was providing an exempt supply of medical services, or, as HMRC claimed, a taxable supply of staff.

Under UK law, the supply of a deputy for a registered medical practitioner may be treated as VAT-exempt. HMRC argued that the provision of a deputy doctor is not exempt, but rather a standard-rated supply of employment agency services, and that it is the medical care provided by the doctor which qualifies for VAT exemption.

The FTT agreed, holding that, although the services provided by the Company came under this UK provision, that law must be considered in light of EU VAT law. The EU’s Principal VAT Directive states that exemption shall only apply to ‘the provision of medical care in the exercise of the medical and paramedical professions as defined by the Member State concerned’.

The FTT found that the company was making supplies of staff, as it had no control over the work carried out by its locum doctors, who worked under the ‘direction and control’ of staff at the NHS Trusts they were supplied to. It also found that UK VAT Law goes beyond the scope of the exemption for medical care allowed by the Directive. In light of this, the FTT reinterpreted the relevant provision of UK law to mean that VAT exemption only applied to ‘the provision of [medical care services provided by] a deputy for a person registered in the register of medical practitioners’.

As the company was not providing ‘medical care services’ under this revised wording, but was instead making taxable supplies of staff, the FTT rejected its appeal.

The significance of this decision is that it has, in effect, completely removed the VAT exemption for supplies of deputy medical practitioners from UK law. Suppliers who had relied on this provision when supplying medical staff to the NHS may now be required to charge VAT, as well as account for VAT on previous supplies. However, it is likely that the FTT’s decision will be appealed, and we will issue another update when there are further developments.

HMRC has released updated guidance about changes to the VAT treatment of self-storage services, which came in to effect last year.

Under the previous rules, the provision of a clearly defined space for the self-storage of goods was VAT-exempt (as a supply of land), unless the self-storage operator had ‘opted to tax’ the land/building for VAT. However, from 1 October 2012, supplies of facilities for the self-storage of goods became taxable for VAT, regardless of whether the supplier had exercised an option to tax or not.

In this context, ‘the ‘self storage of goods’ means the storage of goods in a relevant structure (namely the whole or part of any building, unit or container or other structure that is fully enclosed), by the person to whom the supply is made, or a third party with the permission of that person.

HMRC’s updated guidance emphasises that the VAT treatment depends on how the relevant premises are used by the customer. So if, for example, a property is leased to a customer for use as an office, and the landlord has not exercised an option to tax, the rent will be exempt from VAT. If, however, the customer changes its use so that the building is used for storage, the rent will become taxable for VAT at the standard rate.

NHS bodies which lease properties to non-NHS customers should therefore check if these customers (or third parties) are using the properties for storage and charge VAT accordingly. Those NHS bodies which have not correctly accounted for VAT on supplies of storage facilities should now do so, and if necessary, submit a voluntary disclosure of these errors to HMRC.

HMRC are continuing a programme of ‘aspect checks’ on NHS Trusts, whereby a visit is arranged to review a specific area of VAT compliance. One of the areas being checked is whether NHS Trusts are applying the correct VAT treatment to purchases of non-UK goods and services.

Many of these goods and services are subject to VAT in the country of the recipient rather than the supplier, and where a foreign supplier does not have a UK VAT registration, the customer (i.e. the Trust) will have to account for UK VAT on the sterling value of these supplies.

For goods and services bought from elsewhere in the EU, NHS Trusts must self-account for output VAT at the appropriate rate. However, they may also be entitled to recover the same amount as input VAT, if the goods or services relate to a taxable trading activity, or fall under one of the contracted-out services (‘COS’) headings. This rule also applies to services bought from a non-EU supplier, whilst goods bought from outside the EU are subject to VAT on importation (although this will usually form part of the carriage or delivery charge).

NHS Trusts should therefore check that output VAT is being correctly accounted for on foreign purchases of goods and services, and correct any errors where necessary.

The Department of Health has recently released an updated guidance note for PCT and SHA legacy teams about closedown arrangements for VAT.

The note advises that a final VAT return should be submitted for transactions processed in the period from 1st July to 31st August 2013.

Organisations that have already deregistered can still claim input VAT on some services, as long as these services relate to their taxable business activities that were made when they were VAT-registered. The Department advises that these would include, for example, costs incurred in closing down their accounts. It would be assumed that any VAT incurred since April 2013 on eligible contracted-out services could also be claimed.

VAT cannot be recovered on purchases related to exempt supplies, or on goods purchased after de-registration.

For further advice about claiming VAT on legacy body costs and how these claims should be submitted, please do not hesitate to contact us.

As discussed in our July 2013 newsletter, the VAT exemption for business supplies of research between NHS organisations and other ‘eligible bodies’ (such as universities and charities) is withdrawn with effect from 1st August 2013.

HMRC has now published detailed guidance about this withdrawal, which states that the VAT exemption is no longer available for written contracts that were not entered in to by 1 August 2013.

Transitional arrangements are available for written contracts that were entered in to before this date (regardless of whether or not the work had started). These allow business supplies of research to continue being exempt from VAT for the life of the contract, provided that the services performed are within the scope of the contract as it stood before 1 August 2013.

If a contract is extended or varied on or after 1 August (whether or not the consideration payable is increased), then payments for new or changed supplies will be standard-rated for VAT. Minor variations (such as changes to delivery times or the supplier of a sub-contracted service) will not affect the VAT treatment of the original contract.

For research to be subject to VAT, HMRC advises that it must be supplied by way of business and under a contract or other agreement, in return for consideration, i.e. there must be a direct link between the research supplied and the payment received. Research is not subject to VAT when it is funded, either by the public sector or by the charitable sector, for the wider public benefit, although each research project should be considered on its own merits.

NHS bodies that are making, or preparing to make, business supplies of research should therefore consider the VAT treatment of this research. If you would like further information about how these changes might affect your organisation, or need advice about the VAT implications for a research project, please do not hesitate to contact us.

The High Court has released its judgment in a recent case brought by GSTS Pathology LLP and others, against HMRC’s decision to change the VAT treatment of out-sourced pathology services.

GSTS is a public-private joint venture between Serco Ltd and two NHS Trusts, which was established to supply out-sourced pathology services to the NHS. HMRC had previously advised the joint venture that its pathology services were standard-rated for VAT, and that NHS customers could recover this VAT under the contracted-out services (‘COS’) rules. However, in January 2013 HMRC withdrew its earlier ruling, and stated that such services must instead be treated as VAT-exempt.

GSTS appealed against the withdrawal of the ruling to the First-Tier Tribunal (FTT). It also sought an interim injunction from the High Court delaying HMRC’s implementation of the new VAT liability, pending the outcome of the FTT appeal.

Mr Justice Leggatt granted the injunction, noting that HMRC’s withdrawal of its previous ruling was not supported by any material change in the facts, or in the law. He also commented that the European Court of Justice decision in the case of L.u.P GmbH did not, as HMRC said it did, extend the definition of exempt medical care to laboratory tests ordered by a medical practitioner. Furthermore, although the judgment was released in 2006, HMRC had failed to update its published guidance to reflect this interpretation of the L.u.P case.

HMRC has now released Revenue & Customs Brief 16/2013, apparently in response to these comments, which confirms its revised policy and states that existing VAT guidance will be updated ‘in due course’. However, the High Court injunction prevents HMRC from prospectively enforcing this policy against GSTS until three months after the FTT hands down its decision in the main tax appeal.

It remains to be seen whether the FTT will accept HMRC’s change in policy, and we will provide a further update when the FTT reaches its decision.

Following the judgment of the House of Lords in the joined cases of Fleming/Condé Nast in 2008, many NHS Trusts submitted VAT claims to HMRC for input VAT which had been under-recovered, or output VAT which had been over-declared, in prior accounting periods.

Some types of claim have been accepted by HMRC, such as those for output VAT which was over-declared on catering income. These accepted claims have been paid out in part, where HMRC have agreed that the claimant Trust has entitlement to earlier periods. There may still be scope for further payments pending the entitlement appeals. Other claims have been rejected, including those for input VAT on drugs and prostheses supplied to private patients. These claims relied on the earlier decision of the Court of Appeal in the joined cases of Wellington Private Hospital /BUPA in 1997. The Court held that supplies of drugs and prostheses to private patients qualified as separate, zero-rated supplies of goods, meaning that VAT incurred on the purchase of these items could be recovered as input VAT.

HMRC has rejected these claims on the grounds that the Court’s decision is undermined by subsequent case-law, and therefore cannot be applied retrospectively. Following an appeal, the FTT has now agreed with HMRC, in its recently released judgment in the Nuffield Health case. Rejecting Nuffield’s appeal against HMRC’s refusal of its VAT claim, the FTT held that there was no meaningful separation between the supply of the care elements of the service and the supply of drugs/prostheses as a part of that supply. As such, Nuffield was providing a single, exempt, supply of health care to the patient.

The Nuffield appeal was the lead case for all appeals against HMRC’s rejection of Wellington/BUPA VAT claims, including NHS appeals. It remains to be seen whether Nuffield will appeal this decision to the Upper Tribunal. We will keep you informed if there are any further developments.

NHS organisations should also be aware that the VAT exemption for business supplies of research to other ‘eligible bodies’ (such as universities and charities) will be withdrawn from 1st August 2013.

The decision follows a notification from the European Commission that the exemption does not comply with European law. Currently, business supplies of research between two eligible bodies are exempt from VAT (e.g. research work which is sub-contracted by one eligible body to another), but under the new rules these supplies will become standard-rated for VAT purposes.

The withdrawal of the concession will not affect non-business research, which is defined as research in the public good that is either block-funded (e.g. from a central government grant) or funded by a grant from a body which does not receive goods or services in return (e.g. a research council). This research will remain outside the scope of VAT.

Most supplies of research made by NHS organisations are likely to be grant-funded, and so will not be affected by these changes. However, we await further guidance from HMRC about how these changes will be implemented, such as whether the new rules will apply to research projects in progress on 1st August. It will be worthwhile for NHS Trusts, when reviewing the details of ongoing and future research projects, to determine whether the VAT treatment will change.

HMRC has just released revised guidance on COS heading 37, which supersedes guidance that it had previously issued to NHS organisations in May 2012.

This previous guidance stated that VAT could only be recovered on the supply of maintenance services for leased equipment if this maintenance was provided by a separate supplier to the one making the supply of the lease hire.

HMRC now say that, provided the maintenance is supplied under a separate contract from that of the lease hire, the VAT can be recovered under COS heading 37, even if the maintenance is provided by the same supplier.

HMRC explain that this change in policy is necessary following the decision of the First-Tier Tax Tribunal in the case of Goals Soccer Centre plc. The Tribunal held that the appellant, which owned and operated five-a-side football pitches, was making separate supplies of VAT-exempt pitch hire and standard-rated league participation services for those customers who were in a league. It was not, as HMRC argued, making a single composite supply of league participation/management services which was wholly standard-rated.

The Tribunal placed heavy emphasis on the contractual arrangements for these services, noting that pitch hire and league participation services were subject to separate contracts, with separate terms and separate prices, and that a breach of one contract did not automatically mean a breach of the other.

HMRC has confirmed that the change in policy based upon this decision which was released on 10th September 2012 only supersedes the guidance stated in its May 2012 letter concerning leases and maintenance and not more general COS heading 37 guidance.

Many NHS organisations have already received further correspondence from HMRC reiterating its previous stance on leased equipment and heading 37, and requesting details of VAT recovered on the maintenance of this equipment. In light of the revised policy, NHS organisations can now recover any unclaimed VAT incurred on the maintenance of leased equipment in the current financial year, if the maintenance is provided under a separate contract. This VAT must be reclaimed on a VAT return which is submitted no later than 7th July 2013. NHS organisations should also use this method to recover VAT on qualifying maintenance which may have been repaid to HMRC in the current financial year following the issue of the May 2012 letter.

It should be noted that VAT incurred on the leasing or hire of equipment, plant or vehicles remains non-recoverable, with the exceptions of the ‘hire of reprographic equipment including repair and maintenance’ (COS heading 25) and the ‘hire of vehicles , including repair and maintenance’ (COS heading 26). In both these cases, VAT is only recoverable on contracts for the supply of the equipment/vehicles together with full repair and maintenance services.