The First Tier Tax Tribunal (‘FTTT’) has recently held that where a customer over-pays for parking, the excess amount paid is to be treated as an ex-gratia payment, not subject to VAT. This offers the opportunity for NHS Trusts to make a protective VAT reclaim where they have accounted for output VAT on over-payments received for parking charges.

Background

The FTTT allowed an appeal brought by the Borough Council of Kings Lynn and West Norfolk (‘the Council’) against a refusal of their VAT reclaim by HMRC. The Council operates pay-and-display car parks where customers pay in advance at ticket-dispensing machines. These machines accept coins only and no change is given, but over-payments are accepted. Daily parking is available for periods between 8.00 a.m. and 6.00 p.m. and costs £1.40 for 1 hour, £2.10 for 3 hours and £4.10 for 5 hours.

The Council had previously accounted for output VAT on all its takings from these car parks, but argued that where a customer had over-paid for parking, no output VAT should be due on the over-paid amount. It contended that this over-paid cash was a form of ex-gratia payment, as customers without exact change could choose to make an over-payment for a parking ticket, but would receive nothing extra in return. Where, for example, a customer paid £2.00 for 1 hour of parking costing £1.40, the customer would still only obtain the right to park for 1 hour.

The FTTT agreed with the Council, holding that for a sum of money to be taxable consideration, there must be a link between what is supplied and what is paid for. Customers could not change the amount of consideration for a parking ticket by paying more or less than the specified tariff, and it was only this tariff price which was taxable for VAT.

HMRC has yet to indicate whether it will appeal.

Relevance to the NHS

NHS Trusts which have received over-payments on car parking charges should now consider making a protective claim to HMRC for any output VAT they have declared on these amounts, in any periods within the last 4 years.

We would be pleased to assist with the preparation and submission of a protective claim, which we offer as part of our business activity/accounts receivable review process. Any protective claim will need to be supported by evidence of over-payments, which we can calculate using your records of tickets issued to car park customers and cash income received.

For further information about the case, and to discuss this opportunity for claiming refunds of over-paid VAT, please do not hesitate to contact us.

In our last newsletter, we advised that the scope of VAT recovery under this COS heading is likely to be changing.

It has always been common practice for NHS bodies to recover VAT on supplies of admin and clerical agency staff under COS heading 69.

We now understand that HMRC plan to revise this interpretation and apply the guidance notes for Government departments to the NHS from a prospective date.

The Government department guidance states the following:

69. Typing secretarial, telephonist and clerical services including agency staff

Includes:

• VAT incurred on supplies by agencies providing typing, secretarial, telephonist and clerical services using their own staff
• Provision of typing services by a word processing bureau

Excludes:

• Secondees
• Employee expenses

If agency staff are utilised because of difficulties in recruiting staff to fill permanent posts or are brought in to supplement existing staff levels during busy periods then these would not satisfy the criterion of being a contracted out service for these purposes and consequently any VAT incurred would not be recoverable.

This completely removes the ability to recover VAT on admin/clerical agency staff, allowing VAT recovery on admin/clerical ‘services’ only. The wording ‘including agency staff’ now seems completely obsolete, which makes its inclusion in the Treasury Direction since 1997 something of a mystery.

NHS bodies would therefore be well advised to review the current levels of VAT recovery under COS heading 69 with a view to including this in future budgets.

Many NHS bodies are currently undergoing a compliance check from HMRC on VAT recovered under COS heading 37.

This is a follow-up to the previous letter from HMRC of May 2012 concerning VAT recovery under COS heading 37 and whether this is in relation to leased equipment and if so, whether it is by the same supplier.

The follow up enquiries have however extended HMRC’s apparent interpretation of the rules as follows:

• You cannot claim if a stipulation or requirement exists which states you must use a named supplier for the maintenance, repair and cleaning. This may be due to warranties, guarantees or lease/lease purchase agreements which are dependent on use of certain suppliers (this applies to both owned and leased items).
• You cannot claim the COS VAT for leased items when the supplier of the item is the same as or connected to the one providing maintenance, repair and cleaning.

The first statement concerning owned equipment appears to be something which HMRC has never stated before in any guidance.

It is our understanding that NHS bodies would not generally purchase equipment in circumstances where a supplier stipulates that the maintenance could not be carried out in-house or by a third party. Many NHS bodies follow a purchasing process whereby a supplier of equipment is not selected unless they can provide operating manuals and/or training for in-house (i.e. EME department) or third-party maintenance staff.

Furthermore, such stipulations could be considered illegal under the Competition Act 1998 and therefore void and unenforceable even if they are included in a contract.

As such, there is likely to be no bar to recovering VAT under the COS rules covering heading 37 for owned equipment or equipment leased from a separate supplier, because there can be no legally enforceable stipulation to use a named supplier. If an in-house capability exists at the time a contract is entered into, the conditions for recovery have been met.

Please contact us if you require assistance with responding to HMRC’s enquiry.

The VAT liability of self-storage has changed with effect from 1 October 2012.

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 ‘opt to tax’ the land/building.

Providers of other types of storage services (such as traditional removal companies) which do not provide their customers with a discrete area and are able to move their customers’ goods around within their premises, already charged VAT on their supplies.

With effect from 1 October 2012, supplies of self-storage facilities will be standard-rated regardless of whether the supplier has exercised its option to tax.

Crucially, it will be necessary for the supplier to obtain confirmation from his customer of the use to be made of the space.

NHS bodies which supply space to non-NHS customers should therefore review arrangements to determine the use to which the space is being put in order for VAT to be charged where appropriate.

These changes mean that self-storage providers including NHS bodies that have not previously opted to tax may, subject to the normal rules, be able to recover VAT incurred on related costs, including VAT bearing expenditure of £250,000 or more on certain assets such as land and buildings, which fall within the Capital Goods Scheme (CGS).

Finally, NHS bodies are able to recover VAT incurred on traditional storage services under COS heading 63, however where NHS bodies are supplied with space for self-storage, this would not meet the contracting-out criteria as this is simply a taxable supply of land.

We have learnt that the scope of VAT recovery under this COS heading is likely to be changing.

It has always been common practice for NHS bodies to recover VAT on supplies (from staff agencies) of admin and clerical staff under COS heading 69. Up until around 2007, it was in fact common practice for NHS bodies to recover VAT on all agency staff under this heading, however it was clarified by HMRC back in 2007 that this was meant only for agency staff filling secretarial, admin and clerical type roles. VAT on senior staff (managers, etc) was not to be included.

Since 2007 and up until very recently, we have had further correspondence with HMRC where this position has been confirmed. For example, HMRC wrote to some of our clients recently asking to see details of VAT recovery under COS heading 69 where the position on ‘junior’ vs ‘senior’ admin staff was re-confirmed.

HMRC have recently stated however that the interpretation of this COS heading is being changed, and that it is not meant for supplies of any staff.

Considering the fact that the Treasury Direction currently states ‘including agency staff’ and HMRC has confirmed this in various correspondence and visits up until very recently, we are awaiting formal guidance on when or whether the Treasury Direction will be amended.

We would therefore suggest that NHS bodies rely upon the published guidance and current wording of the Treasury Direction until formal changes are announced. This presumably would be from a future date going forward.

As stated in an earlier newsletter, HMRC have been considering their policy concerning the interaction of the NHS COS VAT rules (in particular, COS heading 26; Hire of vehicles including repair & maintenance), and the 50% blocking order VAT restriction on lease cars (applicable to the car lease but not the maintenance). This review is in light of the changes to the salary sacrifice VAT rules, where, subject to transitional arrangements, schemes have been treated as business supplies since January 2012.

Under the normal business VAT rules, 50% of the input tax incurred on the lease of a car is blocked from recovery. This means that a fully taxable business which is generally able to recover all of its VAT can only recover 50% of the VAT on a lease car. The ‘blocking order’ also applies to partly exempt businesses, where 50% of the VAT is blocked and the remaining 50% of ‘allowable’ VAT must be taken into account in the partial exemption method.

HMRC’s published guidance states that where a business which has blocked input tax makes a car available for private use of an employee for a charge, output tax need not be accounted for.

We have been informed that following consultation, HMRC are looking to apply this rule to NHS bodies making cars available to staff under a salary sacrifice agreement. This will presumably mean that the salary sacrifice amount will be deemed ‘outside the scope’ of VAT, rather than a taxable supply.

What this should mean (although not yet confirmed by HMRC) is that the remaining 50% of input tax which is not blocked will go into the Trust’s business/non-business and PE method, meaning in most cases, the vast majority of the VAT will be recoverable under COS heading 26. HMRC have not yet commented on the treatment of the VAT on the maintenance element, although presumably 100% of this VAT will be treated in the same way as the 50% of the lease VAT.

Hopefully, HMRC will publish their revised guidance shortly.

We have had some further guidance from HMRC on the matter of GPs charging for advice on setting up CCGs.

HMRC have in the past advised GP practices that VAT should be charged (depending upon registration limits, etc) for these services. Furthermore, provided the work is of an advisory nature, the VAT should be recoverable by the recipient PCTs under COS heading 52. This advice was confirmed by HMRC as being correct.

HMRC has now advised that, any payments made to GPs for practice based commissioning work is ‘outside the scope of VAT’ and this applies to payments by PCTs to GPs for transitional work on CCGs.

This is quite important as it would seem that HMRC have previously taken a hard line with some GP practices which have failed to register and charge VAT. Also, some if not most GPs are only potentially liable to register as a result of this type of income, so it would appear from the last point that some may have registered for VAT and been penalised incorrectly and the PCTs are incorrectly recovering VAT charged.

Based upon this revised guidance, the GPs which have charged VAT should raise credit notes and re-issue their invoices without VAT. The VAT recovered by the PCTs should also be adjusted for in the VAT accounts.

Some of the Royal Mail’s postal services became subject to VAT from 2 April 2012, including Cleanmail.

We asked HMRC the question back in March whether VAT would be recoverable by NHS bodies on these taxable mailing services and was advised as follows:

HMRC stated that COS heading 13; Collection, delivery and distribution services – applies to services provided by organisations other than the Royal Mail. For example, services provided by couriers, Rail Freight, Federal Express, UPS etc. and therefore, these expenses do not qualify for COS deduction.

HMRC have subsequently agreed (although not yet confirmed by the Treasury) that the removal of competition barriers and application of VAT on certain Royal Mail services had resulted in them being treated the same as other private sector providers. NHS organisations should therefore recover VAT until clarification was received from the Treasury policy team.

HM Revenue & Customs (“HMRC”) has recently issued a letter to NHS bodies stating their policy on contracted-out services (“COS”) VAT recovery on leased equipment.

In summary, this simply re-iterates the rule (which we included in our newsletter of July 2011) that NHS bodies are only permitted to recover VAT on the maintenance of leased equipment (under COS heading 37) where the maintenance is provided by a separate supplier to the one providing the lease hire.

The key point is ‘separate supplier’. Separate charges or separate invoices from the same supplier of the lease hire do not qualify.

Although not explained in the letter, the reason for HMRC’s stance on this is that the supply of services within a lease package is considered economically not dissociable from a supply of the hire of the goods. In essence, VAT recovery on the service element is inappropriate because what is being supplied constitutes a ‘single supply’ of the letting or hire of goods.

If you currently have, or are looking to enter into any lease contracts with maintenance, we would be happy to provide our advice to legitimately save VAT costs with these types of arrangement.

Determining the VAT liability of supplies of staff is far from straightforward and we are frequently asked by our clients whether VAT should be charged. The relevant legislation is not particularly clear on the point and with the advent of penalties for the NHS, clarifying the issue is a means of taking reasonable care.

The following step-by-step guidance should cover most eventualities.

Basic Rules

The basic starting point is that a supply of staff which come under the ‘direction and control’ of the recipient is taxable at the standard-rate. This means that if you make a member of staff available to work elsewhere, and the staff member is given work, instructions, etc by the recipient, this is a supply of staff. Taken from HMRC’s Public Notice (700/34), there are a few exceptions to this rule, where supplies of staff are not always made in the course or furtherance of business and therefore may be outside the scope of VAT (“OS”), i.e. completely non VATable.

These include:

• secondments between and by government departments (technically, includes the NHS) which require specialist knowledge that cannot be obtained from the private sector;
• secondments between National Health bodies; and
• some secondments between local authorities and by local authorities where they have a statutory obligation or monopoly
• supplies of staff to any person who belongs outside the EU, or to a business belonging in another member state of the EU

In addition, the following are also either outside the scope or exempt from VAT:

• supplies of nursing staff using the nursing agency concession (exempt)
• recharges of staff salaries under Section 75 NHS Act 2006 (pooled budget) arrangements (OS)
• supplies of certain staff to universities under a joint working memorandum (OS)
• supplies of staff to the prison service under similar memorandum arrangements (OS)

Recharges to Charities

Another area of confusion is recharges of staff costs to charities where the charity is funding the costs as part of its charitable aims. In most instances, the staff remain under the direction and control of the NHS body and therefore the recharge is simply a means of funding their salary by way of a grant or donation. These recharges are also generally outside the scope of VAT.

Recharges of Staff to Local Authorities

With regards to supplies by and between NHS bodies and local authorities, it is worth considering the provisions of Part 3 of the National Health Service Act 2006 on this subject. This includes Section 74 to Section 82 of the Act (which also includes the pooled budget provisions referred to above under Section 75). These provisions remain largely unchanged by the 2012 Health & Welfare Act.

Where an NHS body supplies services of staff to a local authority under the terms of Section 80 of the NHS Act 2006 to enable the local authority to carry out its statutory functions, this is a statutory obligation.

It should therefore be permissible for supplies of staff by NHS bodies to local authorities for statutory purposes to be outside the scope of VAT. Where staff are supplied to local authorities for purposes other than the performance of their statutory functions, then these supplies will be taxable.

Joint Contracts of Employment

In cases of joint employment, there is no supply for VAT purposes between the joint employers.

Staff are regarded as jointly employed if their contracts of employment or letter of appointment makes it clear that they have more than one employer.

The contract must specify who the actual employers are.

Staff are not jointly employed if their contract is with a single employer even if it requires them to work for other organisations. As such, staff employed by a single employer which are supplied to work at another organisation are subject to VAT, subject to the basic rules outlined above.

Supplies of Services

Anything else which is not a supply of staff (i.e. where the direction and control condition is not met) is likely to be a supply of services and the VAT liability will depend upon the nature of the service being provided. This could therefore be taxable or exempt (i.e., if a supply of healthcare).