The ECJ has ruled in the case Banca Antoniana Popolare Veneta (BAPV)(C-427/10) that the normal time limits for a supplier to claim a refund of VAT overpaid to tax authorities could be extended under certain conditions.

The case involved a change of VAT treatment of a supply of services, where the treatment was thought initially to be taxable (and VAT was paid over to the tax authorities), but was retroactively regarded as exempt.

BAPV’s customers brought proceedings against them for repayment of the VAT and their claims were admissible due to the period of limitation in Italy being ten years for such claims.

However, BAPV were unable to recover the VAT they had paid over to the authorities, due to a limitation on such claims in Italy being two years.

According to the ECJ ruling, a supplier should not be financially disadvantaged because of errors by tax authorities which he cannot control. Therefore if the sum a supplier must reimburse his customers is more than he can claim from the authorities (due to more generous civil law time limits for customers than those open to suppliers), then the VAT time limits for suppliers should be extended to ensure parity in the amounts recovered by both parties.

In the UK, the civil law time limit for customer claims for reimbursement for commercial loss is six years, whereas the VAT time limits to claim back overpaid VAT from HMRC is four years.

So, there is a likelihood that at some stage the UK may see the VAT time limit challenged again with a view to matching the civil law time limit.

The following sets out how to properly account for VAT on cycle to work schemes from January 2012, plus some further commentary on the difficulties surrounding lease car schemes.

General Rules

HMRC Brief 28/11 stated that deductions under salary sacrifice schemes would become subject to VAT where applicable from the 1st January 2012.

Trusts already providing bicycles or cars outside of a salary sacrifice arrangement are not affected, as payments received from employees were already subject to VAT and continue to be so.

The subsequent HMRC Brief 36/11 outlined some transitional rules which meant that not all salary sacrifice schemes became automatically taxable from January.

To summarise the transitional rules:

  • VAT must be accounted from 1 January 2012 on agreements in place which were entered into from 28 July 2011.
  • Agreements that were signed or otherwise agreed by the parties on or before 27 July 2011 and which extended beyond 31 December 2011, will continue to be free of VAT until:
    • The date that a fixed term agreement expires or the fixed number of salary sacrifice payments specified within the agreement are completed (if the agreement expired before 1 January 2012, any agreement subsequently entered into should be treated as subject to VAT).
    • The date of an employee’s annual salary/benefits review. HMRC will regard any salary sacrifice arrangements put in place after that date as a new agreement for VAT purposes. This will be the case even if the employee continues to receive the same taxable benefits as before the review.
    • The date of any other review or renegotiation that leads to a change in the provision of benefits under a salary sacrifice agreement or to a change in an employment contract.

Following one of the above events VAT will be due on any taxable benefits provided on or after 1 January 2012 by way of salary sacrifice.

Cycle to Work Schemes

In respect of cycle to work schemes, this means that subject to the transitional rules:

  • Trusts would need to account for output tax on the value of the salary foregone by participating employees in exchange for the hire or loan of a bicycle.
  • Trusts are able to recover VAT as business input tax on the associated hire or loan of goods.

Lease Car Schemes

The changes to the VAT rules affecting lease car schemes are slightly more problematic for pre-existing schemes due to the interaction between the NHS non-business VAT rules and the business VAT rules.

NHS Trusts are able to recover the VAT on the purchase of lease cars, provided with maintenance, under contracted-out services (“COS”) heading 26. COS VAT recovery is however conditional upon the purchase being used for non-business purposes.

As stated previously, where Trusts have charged staff for lease cars outside of a salary sacrifice arrangement, this has always been treated as a business supply with output tax due.

In theory, this means that the VAT incurred on the associated purchase is recoverable as business input tax (rather than COS VAT) at least for the element of private use, however in practice, most Trusts have simply treated this all as COS VAT recovery. To-date, HMRC has never challenged this treatment due to there being no apparent tax loss.

Pre-Existing Schemes

Prior to the changes in the VAT rules, lease car scheme deductions for existing salary sacrifice schemes were outside the scope of VAT (i.e. non-business) with no output tax due. As such, Trusts continued to recover VAT on associated lease costs under the COS rules.

This has meant that in most cases, pre-existing scheme employees have benefitted not only from PAYE and NI savings, but also from a lower cost lease car, due to the amounts sacrificed being net of VAT.

Apart from the transitional rules outlined in HMRC Brief 36/11, most schemes have now become taxable from 1 January 2012. This means that the VAT incurred on the associated lease cost will remain recoverable by the Trust, albeit strictly speaking as business input tax rather than COS VAT.

Because the VAT on pre-existing schemes was already being recovered with the net cost charged to the employee, the output tax now due will be a further cost to either the employee or the Trust. This depends upon whether the charge to the employee can be increased to take account of the VAT under the terms of the agreement.

There are added complications where NHS Trusts have utilised car schemes set up by other NHS bodies, where the recharges between the organisations have been VAT free due to the divisional registration rules. In these circumstances, the NHS body running the scheme is likely to have recovered VAT under the COS rules and charged the net cost onto the employer Trust, which in turn has charged the net cost onto the employee.

We understand that HMRC has referred a paper to HM Treasury concerning the VAT treatment in these circumstances and also whether the normal business 50% VAT restriction on lease cars (applicable to the car but not the maintenance for taxable businesses) has any bearing where cars are made available for personal use.

Until further guidance becomes available, VAT should be declared on the deductions from the employer Trust to employees.

The VAT Tribunal of the Field Fisher Waterhouse case TC/2010/01947 has requested a ruling from the ECJ to establish the correct treatment of common area service charges in respect of leased properties (where no option to tax has been exercised, or one cannot be exercised).

The case questions whether service charges under a lease of a non-opted building are consideration for a separate supply subject to VAT. Essentially, the Tribunal is asking if the decision in the Tellmer case (C-572/07) can be used within the Field Fisher Waterhouse situation.

In the Tellmer case, the ECJ held that the letting of flats in a block and the cleaning of its the common areas should be considered as individual components of two separate supplies for VAT purposes, and that the cleaning services are a separate taxable supply, rather than subsumed within the exempt supply of letting.

The outcome of this case will be very important as it will confirm whether or not landlords make single or multiple supplies of similar services for VAT purposes. Currently, the UK VAT perspective holds that service charges are viewed as closely linked to the supply of letting and attract the same VAT liability. This is because the maintenance and cleaning of common areas of leased properties are usually provided for by landlords within tenancy agreements.

The forthcoming decision will provide much needed clarification for NHS Bodies and the potential for VAT recovery in respect of service charges which could potentially fall under the COS rules (e.g. cleaning, maintenance). It will also have a bearing upon the VAT liability of property leased by Trusts to non-NHS tenants (e.g. GPs, CICs, etc).

The Sue Ryder charity has been campaigning to change Government policy on VAT relief for charities providing hospice care, which has resulted in a proposed amendment to the Health and Social Care Bill.
A new Bill is now moving through Parliament which will make provision for charitable healthcare providers taking on new responsibilities from the NHS.
As part of the health service reforms, more NHS services will transfer to the charity sector, so Sue Ryder is encouraging the Government to put charitable healthcare providers onto an equal footing with the NHS in relation to VAT recovery.
The point of this Bill is to aid cash flows and stem running costs of the Not for Profit organisations undertaking new tasks (e.g., Sue Ryder), where they appear at a financial disadvantage in comparison to NHS bodies performing similar tasks.
It is unclear how this will impact other income streams of the charity sector and how it will be implemented and whether the proposed cost sharing VAT exemption scheme in the next Finance Bill would have any bearing, but we will update you as soon as information is available.

HMRC has published two updated VAT Notices (701/31 – Health Institutions and 701/57 – Health Professionals). These include a few areas of clarification which are of interest to NHS bodies.

These are:

Self Employed Locums

As part of the Health Professionals update, the VAT treatment of supplies made by self-employed GP locums, has been clarified. This now states that when self–employed GP locums supply their services to an employment business which makes an onward supply to a third party who is legally responsible for providing health care to the final patient, both the supplies to and from the employment business are taxable.

Doctors supplying locum services via employment agencies or on a self-employed basis where the recipient of the service (e.g. an NHS body) is legally responsible for the care should consider whether VAT registration is required.

It must also be noted that where an NHS body utilises agency locums or locums operating through their own company or on a self-employed basis, any VAT charged will not be recoverable by the NHS body.

Contracted-Out Pharmacy Arrangements

The updated Health Institutions notice now provides additional guidance on independent pharmacies operating within hospitals. By concession, HMRC allow pharmacists (including those operating from an independent pharmacy within hospital premises) to zero-rate drugs, medicines and other qualifying goods that are supplied to:

  • an in-patient of a hospital or
  • any person attending the premises of a hospital for medical care or treatment where all of the following conditions are met:
  • The items dispensed are qualifying goods designed or adapted for use in connection with medical or surgical treatment
  • The items are dispensed by a pharmacist in the normal way, on the prescription of a medical practitioner who is providing primary health care services
  • The items are intended for self-administration by the person named on the prescription
  • The items are supplied separately from, and do not form any part of, any medical services, treatment or care provided in the hospital or nursing home
  • In the case of NHS prescriptions, the pharmacist is acting under the appropriate NHS Pharmaceutical regulations, and is reimbursed for the dispensed items by one of the NHS bodies that pay for community pharmacy services.

The notice goes on to state that the application of this concession must not give rise to any abuse of the VAT system and HMRC may withdraw or restrict the application of this concession if they have reasonable cause to believe that it is being used for tax avoidance purposes.

The full revised notices can be obtained from the following links:

VAT Notice 701/31 – Health Institutions

VAT Notice 701/57 – Health Professionals

Under the VAT rules, certain medical equipment can be zero-rated where the equipment is a medical or surgical appliance that is designed solely for the relief of a severe abnormality or a severe injury, and has been purchased for the personal or domestic use of a person defined as ‘chronically sick or disabled’. This particular relief is not however available when the purchase is funded by an NHS body.

Zero-rating is however available for certain equipment purchased by an NHS body wholly from charitable funds.

Therefore, where NHS bodies make purchases of this nature from non-charitable funds, suppliers should charge VAT at the standard–rate (20%).

Generally speaking, there is no VAT recovery available for such products by NHS bodies under the contracted-out services (“COS”) rules and there is unlikely to be VAT recovery under business VAT rules. However, if the NHS body purchases maintenance, repair or support in respect of such products, VAT recovery under COS may be available subject to the normal conditions.

HMRC are currently considering enacting the VAT Cost Sharing Exemption. This is a provision of EC VAT law not currently applicable in the UK which allows businesses and organisations making VAT exempt and/or non-business supplies to form groups in order to achieve cost savings.

The principal benefit of the exemption is that by removing a VAT charge on supplies of goods and services between certain organisations, it will facilitate efficiency savings for organisations working together which are unable to recover all of their VAT on purchases.

If enacted, this exemption may enable cost savings on transactions between NHS bodies and social enterprises or charities, where these types of organisation have taken responsibility for previous NHS functions and the addition of VAT on re-charged costs can be a burden.

HMRC are due to publish their findings from a consultation process on policy design and a framework for possible future implementation. We will inform you of this as soon as further details are available.

Some NHS Trusts have been advised in the past that where an invoice shows separate lines for different elements of a supply, these invoices cannot be apportioned or ‘split’ in order to recover VAT on the eligible COS part.

Although this may be true in some respects, this is not always the case as each supply and invoice needs to be considered on its own merits.

The aim of this newsletter is to clarify this point for our NHS clients and prospects in order to help maximise COS VAT recovery. Although not exhaustive, we have set out below some circumstances where it may be permissible to partially recover VAT on invoices for COS VAT recovery purposes.

Background – Single or Multiple Supply?

There have always been problems in determining the correct VAT treatment of transactions consisting of separately identifiable goods or services and whether there is a single supply or a multiple supply made up of several elements. Usually, the problem concerns the VAT liability of supplies (e.g. standard-rated or zero-rated), however the same principle applies to whether VAT can be claimed or not on all or part of a supply.

VAT legislation provides no real rules on this point, so over the years tribunal and court decisions have produced general guidelines, the most persuasive of which is the ECJ decision in Card Protection Plan Ltd. The key points from this case are:

  • Regard must be paid to all the circumstances in which the transaction takes place.
  • Each supply of a service must normally be regarded as distinct and independent but a supply that comprises a single service from an economic point of view should not be artificially split – the essential features of the transaction must be ascertained to decide if the supply to a typical customer comprises several distinct services or a single service.
  • There is a single supply in cases where one or more elements are to be regarded as ancillary services. An ancillary service is defined as something that does not constitute for customers an aim in itself but is a means of better enjoying the principal service supplied.
  • The fact that a single price is charged is not decisive. If the circumstances indicate that customers intend to purchase two or more distinct services a single price will not prevent these being treated as separate supplies with different liabilities applying to those services.

Application to COS VAT

Considering the above criteria, where a mixed supply is evident and certain elements are for services which are eligible for recovery under COS, the VAT on that element can be recovered.

Conversely, where a single supply is evident, it would be correct to treat the VAT according to the principal element. If the principal supply is not eligible for recovery (e.g. goods), then none of the VAT should claimed. If the principal supply is eligible for recovery (e.g. repair services involving fitting new parts), then all of the VAT can be claimed. The COS Treasury Direction does in fact state that VAT recovery is eligible on listed ‘services and closely related goods’, which allows VAT recovery in these circumstances.

Examples of Mixed Supplies Where Part of the VAT Can be Recovered

Given the circumstances, there cannot be a definitive list of what supplies can or cannot be apportioned, however examples agreed with HMRC include:

  • Where an NHS body purchases equipment, any maintenance service supplied is recoverable when either supplied by the same supplier or a separate supplier. In these circumstances, the maintenance usually could have been purchased optionally or able to be purchased as a stand-alone service. This would indicate that it is permissible to recover VAT on the maintenance part of such invoices if separately itemised.
  • Orthotic supplies – VAT on repairs and or adaptations to existing patient appliances is recoverable if the supply is primarily one of services as opposed to goods. Also, HMRC have agreed to VAT recovery on the repairs/adaptation element of invoices containing mixed supplies. The supply of bespoke footwear, appliances, wheelchairs specifically designed for a patient is not recoverable as this is considered a supply of goods.
  • Capital schemes with elements of building repairs, cleaning or waste disposal. In these circumstances, HMRC specifically allow VAT recovery on a proportion of invoices, either using a line-by-line analysis, or by applying a published banding percentage. The invoices need not be itemised for apportionment to still apply.
  • If a printing supplier includes printed documents and standard stationery on the same invoice, it is permissible to treat the printed items as a separate supply and recover the VAT on this element, again, if separately itemised.

Examples of Single Supplies Where Invoices Should Not Usually be Split

  • Supplies of goods with itemised delivery – these are single supplies of delivered goods and no VAT is eligible for recovery under COS. The issue of delivery costs as being ancillary to the principal supply is well tested in the courts.
  • On leases of equipment, it is usually possible to include or exclude the maintenance at the outset of a lease depending upon the customer’s requirements. However, where an NHS body leases equipment, any maintenance service supplied is only recoverable if the maintenance is from a separate supplier, (apart from hire of vehicles and photocopiers when all the VAT is recoverable where maintenance is part of the supply).
  • IT equipment with training, consultancy, etc – if the training relates merely to being shown how to use the equipment when initially purchased or leased, HMRC would consider the training element to be part of the one supply of equipment and cannot be split out. IT consultancy is recoverable but if it is inherent to the supply of software or hardware then it may not be recoverable and the whole nature of the supply will need to be considered.
  • Supplies of cleaning services with consumables – in these circumstances, the cleaning company is using the consumables to provide cleaning services, so the whole supply is eligible for recovery under COS including the consumable goods.

Summary

To summarise, it is certainly possible to apportion invoices for COS VAT recovery in many circumstances, but regard must be paid to the nature of the supply.

If your Trust has be advised not to recover VAT on a proportion of invoices under any circumstances, CRS VAT Consulting would be interested in helping you to achieve the correct VAT recovery going forward.

In an article from November 2010, we informed you about the introduction of VAT penalties for the NHS for the first time from April 2011.

To re-cap, the penalties are designed so that if a taxpayer takes ‘reasonable care’ when completing a return, they will not be penalised for an error. The penalties could range between 15% and 100% of the VAT but can be reduced or eliminated depending upon whether the error is voluntarily disclosed before HMRC discovers it (unprompted) or after HMRC makes enquiries (prompted).

HMRC are still yet to provide any further guidance on how they are going to apply the penalties in respect of the specific NHS rules, in particular contracted-out services (”COS”) VAT. We have been told that further guidance is imminent and we will share this with our clients as soon as this happens.

In order to be prepared going forward, we believe it would be prudent to ensure that robust systems and procedures are in place to ensure that any VAT errors are minimised and disclosed where necessary.

What is ‘Carelessness’?

HMRC’s expectation is that taxpayers will take reasonable care in ensuring tax returns, reclaims and dealings with HMRC are correct.

Whether a taxpayer has acted carelessly is somewhat subjective and will depend upon the circumstances, however the following are all possible examples of carelessness:

  • Failure to keep records
  • Failure to seek appropriate advice
  • Failure to supply relevant information to a VAT adviser
  • Failure to implement adequate procedures or systems to produce accurate tax information
  • Estimating amounts entered on returns
  • Not checking for implementation and failures in planning/technical areas

Taking Reasonable Care – Further Recommendations for you to Adopt

Taking and acting upon advice from a competent and qualified expert is generally considered to be taking reasonable care.

As a matter of course, if not already in place, we would recommend all NHS bodies to set up a permanent electronic and paper file of all internal VAT procedures, HMRC correspondence and VAT advice.

This should include:

  • Written procedures for completion of the VAT return
  • A robust written procedure for making VAT journal adjustments to ensure that these are compliant with the penalty regime
  • Written procedures for identifying all purchases from outside the UK and application of the reverse charge VAT procedures. We can provide free helpline advice on this topic
  • Copies of all letters to and from HMRC (e.g. regarding business and partial exemption approvals, capital VAT approvals over £50,000, options to tax, etc)
  • Copies of all VAT review findings and adjustments, VAT advice received and VAT newsletters.

In addition, the following actions should also be undertaken:

Review all sales and cash income to ensure that the correct VAT liability is applied. We have produced a checklist of all of the main areas of income generation and the current VAT liability to be applied. This should cover most areas, but if there are any areas of income generation which you are still unsure about, we would be happy to advise.

Ensure that any VAT recovery on capital projects meet HMRC requirements and any banding percentages used are justified. Also ensure that any capital schemes where VAT recovery exceeds £50,000 are disclosed to HMRC.

Ensure that any current or anticipated land and property transactions are considered for VAT purposes and ensure that any option to tax notifications are recorded, complied with and kept with the permanent VAT file.

Where you have exempt business income (e.g. private patient care or property rental) ensures that the partial exemption calculations and submissions are completed on time.

Review of any existing managed healthcare facility or managed laboratory contracts to ensure correct VAT treatment.

Review of any non-NHS third party arrangements where there are potential VAT issues (e.g. S75 agreements, other arrangements with local authorities, prisons, universities, charities or social enterprise companies).

Penalty Mitigation by Disclosure to HMRC

The potential penalties can be mitigated depending upon the timing and level of disclosure of errors and the level of co-operation with HMRC. There is a greater reduction for “unprompted” versus “prompted” disclosure. An unprompted disclosure is made at a time when a taxpayer has no reason to believe HMRC had discovered or were about to discover the inaccuracy concerned.

It must be noted that correcting an error in the next VAT return is not disclosure.

At present, there is no requirement to submit COS VAT adjustments to HMRC for their prior approval before adjusting the VAT return. HMRC have not yet said whether this would change from April, however under the normal commercial VAT rules, net errors not exceeding the greater of £10,000 or 1% of turnover, subject to an upper limit of £50,000, can be adjusted on a current VAT return.

If the error was caused by a failure to take reasonable care (or there is any doubt on this point) a separate disclosure may be necessary (or prudent) to ensure penalty mitigation.

The standard rate of VAT is due to rise again from 17.5% to 20% on 4 January 2011. This rise in VAT may encourage NHS organisations to make large value purchases in December 2010 rather than in January 2011, but there are other ways to ensure that the lower rate of VAT is applied where possible to supplies.

As NHS bodies are unable to recover all of the VAT they incur, the correct application of the rules should be considered to avoid any unnecessary costs.

Below are various transactions which your NHS body may be involved in during the period of the rate change. A special set of transitional rules are available to enable relief from the charge to VAT at 20% in particular circumstances.

Supplies Made and Invoiced for / Paid for Prior to 4 January 2011

The provision of goods and services prior to the 4 January 2011 deadline, which are invoiced for or paid for prior to that date, will be subject to VAT at the current standard rate of 17.5%.

Supplies Made on or after 4 January 2011 but Invoiced or Paid for in Advance

Where services or goods are invoiced for or paid for in advance, the VAT rate usually applies according to the date of the invoice/payment under the normal ‘tax point’ rules. Therefore, if a supplier raises an invoice prior to 4 January or your NHS body pays in advance for goods or services supplied from 4 January 2011, the 17.5% VAT rate can still apply.

It may therefore be advisable to arrange for pre-payments in relation to certain supplies due to be made after the rate change to trigger a lower tax point at 17.5%, however, commercial risks, cashflow issues and ‘anti-forstalling’ legislation should be considered beforehand.

In certain circumstances, the ‘anti-forestalling’ legislation introduces a supplementary charge of 2.5% VAT which limits the extent to which a benefit can be obtained by applying the 17.5% rate to supplies of goods or services provided on or after 4 January 2011.

Supplies Made Before 4 January 2011 but Invoiced from 4 January 2011

Under the normal rules, a VAT invoice issued on or after 4 January 2011 (usually within 14 days) which relates to work completed before that date will be chargeable to VAT at 20%. This also applies to any retention payment received on or after 4 January 2011. However, the special change of rate rules can be applied in this situation.

If a supplier issues a VAT invoice on or after 4 January 2011 for transactions completed before 4 January 2011, it may, if it wishes, apply the 17.5% rate. The supplier may decide to apply these rules even after it has issued a VAT invoice showing 20% VAT. If it does, it must issue a special credit note giving credit for the extra 2.5% VAT within 45 days of the rate change (i.e. by 18 February 2011). The original invoice should not be cancelled. The special rate change rules apply to the provision of goods as well as services.

Your NHS body may have entered into a construction contract (which may include design, advisory and supervisory services) which requires it to make stage payments. Under the normal rules, if your NHS body continues with work under a stage payment contract on 4 January 2011, any VAT invoices it receives or payments it makes on, or after, that date will be liable to VAT at 20%. However, the special change of rate rules can be applied by your supplier if it issues a VAT invoice or receives a payment (including retention or final account payments) covering work actually performed before 4 January 2011. This enables VAT to be charged at 17.5% on the work performed up to midnight 3 January 2011. (VAT will be chargeable at 20% for work completed after this date).

Work in Progress on 4 January 2011

Your supplier may be carrying out a service which commences before 4 January 2011 and is still in progress after that date. The normal rule is that where an invoice is issued or a payment received after 4 January 2011, VAT is chargeable at 20%, even if part of the supply was undertaken before that date.

The special rules enable the element of work performed before 4 January 2011 to be charged at 17.5%, (including retention or final account payments). An apportionment of the value of the transaction should be made by the supplier (based on measurable work or normal costing or pricing structures).

Continuous Supplies

If your supplier provides goods or services on a continuous basis and receives payments regularly or from time to time, it must declare VAT to HMRC (the tax point) every time it issues a VAT invoice; or receives a payment (whichever happens first). Under the special change of rate rules, it may account for VAT at the 17.5% rate on that part of the supply made before 4 January 2011. This is the case, even if the normal tax point occurs later (for example, where a payment is received in arrears of the supply).

If the supplier decides to do this, it should account for VAT at 17.5% on the value of the goods actually supplied or services actually performed before 4 January 2011. After this date, it must account for VAT at 20% on the value of the goods actually supplied or services actually performed. This may represent a significant cost saving for NHS bodies receiving such supplies, given that they may be unable to recover all the related VAT.

Example

A supplier leases beds to a hospital for £5,000 per month plus VAT. It invoices quarterly in arrears. What VAT should the supplier charge for the quarter covering 1 November 2010 to 31 January 2011?

The normal rule is that VAT should be charged at 20% on the entire £5,000 fee because the invoice is issued after 4 January 2011. However, if a supplier so wishes it can charge VAT at 17.5% on the amount due for from 1 November to 3 January. As the hospital is not generally able to recover the VAT, using the special rules will result in a VAT saving.

Single Supplies Carried Out Over a Period of Time

A supplier may make a single supply of a service which is carried out over a period which commences before 4 January 2011 but is not completed until after that date. Unless the supplier has received payment or issued a VAT invoice before 4 January, the whole supply should be charged at the 20% rate under the normal rules.

However, if the supplier wishes it may charge VAT at 17.5% on the work done before 4 January 2011 and 20% on the remainder. The supplier will have to demonstrate to HMRC that the apportionment between the two amounts accurately reflects the work done in each period.

Example

A hospital subscribes to a web-based information provider from 1 October 2010 to 31 March 2011. How does the hospital calculate the VAT?

The web-based information provider may account for VAT at 17.5% on the website access provided before 4 January 2011 and 20% on the remainder. It will need to be able to show that its calculation is accurate – perhaps by maintaining a usage log to demonstrate this.

Income Generation

The same rules as above apply to business supplies made by NHS bodies.

You need to ensure that your own accounting systems and staff responsible for debtor income, cash income and income generated from staff salary deductions are prepared to charge VAT at 20% on appropriate business supplies from 4 January 2011.

Where VAT is calculated on gross income receipts (e.g. car parking or catering), the fraction used to calculate the VAT will need to be changed from 7/47ths (for 17.5% VAT) to 1/6th (for 20% VAT).

With the VAT rate increase to 20% and the introduction to the NHS of penalties and interest on VAT errors from 1 April 2011, it is more important than ever to ensure that the correct VAT liability is applied to business income generation. Please visit our website at www.crsvat.com to download a business income VAT liability table showing the VAT rate for common business supplies of NHS bodies.