Although online VAT return filing and payment will become compulsory from 1 April 2010 for businesses with an annual business income turnover of £100,000 or more, these new procedures are not yet available to the NHS. You should therefore continue to receive and submit the paper returns until further guidance is announced for the NHS.
The standard rate of VAT is due to rise from 15% to 17.5% on 1 January 2010. This rise in VAT may encourage NHS organisations to make large value purchases in December 2009 rather than in January 2010, but there are other ways to legitimately take advantage of the lower VAT rate.
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 17.5% in particular circumstances. As NHS bodies are unable to recover all of the VAT they incur, the rules represent a vital cost saving opportunity.
Supplies Made and Invoiced for / Paid for Prior to 1 January 2010
The provision of goods and services prior to the 1 January 2010 deadline, which are invoiced for or paid for prior to that date, will naturally attract a charge to VAT at 15%.
Supplies Made After 31 December 2009 but Invoiced or Paid for in Advance
Where services or goods are invoiced for or paid for in advance, the VAT rate applies according to the date of the invoice/payment under the normal rules. Therefore, if a supplier raises an invoice in December or your NHS body pays in December for goods or services supplied in January, the 15% VAT rate will still apply.
Supplies Made up to 31 December 2009 but Invoiced from 1 January 2010
Under the normal rules, a VAT invoice issued on or after 1 January 2010 (usually within 14 days) which relates to work completed before January will be chargeable to VAT at 17.5%. This also applies to any retention payment received on or after 1 January 2010.
However, the special change of rate rules can be applied in this situation. Therefore, if a supplier issues a VAT invoice after 1 January 2010 for transactions completed before 1 January 2010, it may, if it wishes, apply the 15% rate. The supplier may decide to apply these rules even after he has issued a VAT invoice showing 17.5% VAT. If it does, it must issue your NHS body with a special credit note giving credit for the extra 2.5% VAT within 45 days of the rate change (i.e. by 14 February 2010). 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 1 January 2010, any VAT invoices it receives or payments it makes on, or after, that date will be liable to VAT at 17.5%. 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 up to 31 December 2009. This enables VAT to be charged at 15% on the work performed up to midnight 31 December 2010. (VAT will remain chargeable at 17.5% for work completed after this date).
Work in Progress on 1 January 2010
Your supplier may be carrying out a service which commences before 1 January 2010 and is still in progress after that date. The normal rule is that where an invoice is issued or a payment received after 1 January 2010, VAT is chargeable at 17.5%, even if part of the supply was undertaken before that date.
The special rules enable the element of work performed before 1 January 2010 to be charged at 15%, (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 15% rate on that part of the supply made before 1 January 2010. 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 15% on the value of the goods actually supplied or services actually performed before 1 January 2010. After this date, it must account for VAT at 17.5% 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 2009 to 31 January 2010?
The normal rule is that VAT should be charged at 17.5% on the entire £5,000 fee because the invoice is issued after 1 January 2010. However, if a supplier so wishes it can charge VAT at 15% on the amount due for November and December 2009. 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 1 January 2010 but is not completed until after that date. Unless the supplier has received payment or issued a VAT invoice before 1 January, the whole supply should be charged at the 17.5% rate under the normal rules.
However, if the supplier wishes it may charge VAT at 15% on the work done up to 31 December 2009 and 17.5% 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 2009 to 31 March 2010. How does the hospital ward calculate the VAT?
The web-based information provider may account for VAT at 15% on the website access provided before 1 January 2010 and 17.5% 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.
Property owners and landlords (including NHS bodies) are now able to revoke an Option To Tax in order that sales and lettings of a property can revert to being exempt from VAT. This may lead to opportunities for certain NHS bodies which opted property at the inception of the Option To Tax regime.
The Option To Tax was introduced on 1 August 1989. It allows businesses ( as well as NHS bodies making business supplies ) to elect to charge VAT on supplies of a commercial property, thus allowing VAT recovery on related costs such as construction or refurbishment. Without the option, supplies made involving a commercial property would be exempt from VAT and the recovery of VAT on related costs would only be possible if it fell below the de-minimis level of VAT.
An option can be revoked where more than 20 years have elapsed since it was first given effect. Therefore, for an owner who had opted to tax a property on or around 1 August 1989, the first opportunity to remove it has arrived. The revocation of an option may benefit an NHS body which owns property it wishes to sell or let.
For example, if an NHS body decides to sell one of its properties where the option has been revoked, it will not have to charge VAT. This will benefit a potential buyer who is unable to recover the VAT. ( e.g., a GP clinic, a private hospital, charity or an education provider).
Alternatively, a tenant who cannot recover VAT may view the rental of a property, where the option has been revoked, as a more attractive choice than renting another building which may have an option in place.
Land and Property is a very complicated area of VAT. Therefore before making the decision to revoke an Option To Tax, an NHS body must fully understand the ramifications. Please feel free to contact us if you need more specific advice.
We are frequently asked to provide definitive advice on the recoverability of VAT on staff agency fees and consultancy services. We have therefore reproduced the current rules below, together with some additional guidance regarding the differences between staff and consultancy services.
Nursing and Admin Staff – Headings 41 and 69
At present, NHS bodies are able to recover VAT on supplies of nursing staff (including qualified and non-qualified nurses/healthcare assistants) under contracted-out services (“COS”) heading 41 and admin/clerical grade staff (including receptionists, secretaries, data inputters, accounts clerks, etc) under COS heading 69.
VAT cannot be recovered under any COS heading on any other staff provided by an agency, such as medical staff (doctors/locums/consultants, social workers, physiotherapists, laboratory or theatre technicians, radiographers, etc.) and other support staff, (cooks, cleaners, laundry workers, drivers, porters, etc).
The supply of services such as catering, laboratory, laundry, library services, collection & delivery, passenger transport, pest control, security, etc. continue to be eligible under the various headings as contracted-out services in their own right, but supplies of agency staff carrying out these functions are not eligible for recovery.
Consultancy Services – Heading 52
Consultancy and advisory services are eligible for VAT recovery by NHS bodies under COS heading 52. This currently includes the professional fees of architects and structural engineers, quantity surveyors, etc associated with building schemes. Also included are the services of solicitors, computer consultancy work, including software development and other departmental advisory work, legal advice and internal audit.
However, supplies of ‘consultants’ by an employment agency (typically but not always) to fill a post, (e.g. interim financial controller, director of IT, etc), where the consultant comes under the ‘management and direction’ of the NHS body are not eligible for recovery as these are deemed to be supplies of senior staff.
These rules can sometimes lead to confusion because many staffing agencies and consultancy firms alike use interchangeable terms like ‘interim’ or ‘consultant’ in their contracts and invoicing procedures.
Areas at risk include:
- Where a consultant assignment is for the duration of a ‘project’ and works for an in-house project team. This can sometimes seem like consultancy due to the nature of the project (e.g. IT development), however may really be staff augmentation and therefore not eligible.
- Where a consulting firm’s contract is based on ‘time spent’ with vague or no deliverables and their invoice is accompanied by a timesheet (instead of for instance a fixed contract with specific deliverables and acceptance criteria). These can sometimes be confused as supplies of staff, where in reality the consulting firm has been appointed to provide advice which is eligible for VAT recovery. The presence of a timesheet is not therefore a deciding factor.
- Where a consulting firm’s range of services include both advice and staff augmentation but their invoicing does not clearly differentiate between the two. Again, each individual supply must be considered separately to determine the eligibility.
Although not exhaustive, we recommend the following checklist is used as a rule of thumb to determine eligibility for VAT recovery on consultancy services:
If a consultant:
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If a consultant:
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| This is typically a supply of staff and therefore not eligible for VAT recovery. | This will generally be a supply of professional services and provided the usual COS conditions are met, will be eligible for VAT recovery. |
This advice outlines the general rules to apply, so please contact us for specific advice if you are still unsure.
We are pleased to announce that CRS VAT Consulting has recently been awarded a framework contract through The East of England Collaborative Procurement Hub (“EOECPH”) to provide VAT services as part of a wider analysis and reconciliation framework. The Contract was tendered by EOCPH on behalf of NHS bodies in that region, but also covers the South East Coast CPH, Procure, London Procurement Programme and Re;Source. We understand that the agreement will also be offered throughout other procurement hub regions.
This contract means all of the NHS Trusts, Primary Care Trusts, NHS Foundation Trusts and Health Authorities within these hubs can benefit from our range of VAT services at competitive prices without the need to go through a long tendering process.
Since 2002 CRS VAT Consulting has grown to become a leading provider of VAT services to the NHS. We have achieved this by consistently identifying increased levels of VAT recovery for our NHS clients and offering a flexible, professional service. We already work for a large number of NHS bodies within the procurement hub regions and now look forward to being able to extend our services to a wider NHS audience. As a firm of chartered tax advisers, the greatest value we provide to our NHS clients is the level of unrivalled VAT knowledge and expertise gained through experience within the NHS and commercial sectors. This expertise translates into higher levels of VAT recovery.
Changes are about to be made in respect of VAT Place of Supply rules from 1 January 2010 due to a Europe wide initiative called “The VAT Package”. It aims to simplify the current rules relating to cross – border supplies of services and the recovery of VAT on purchases made in other EU countries.
Most notably, the ‘general rule’ for business to business (including NHS) supplies of services shall change. Services will be taxed at the place where the organisation receiving such supplies is established and no longer where the supplier is established, which is the current general rule.
Effect on Services Receiced by NHS Bodies
The place of supply for VAT purposes of many services which NHS bodies currently receive is in most cases already determined by the location of the NHS bodies themselves ( being located in the UK, you account for UK VAT to HMRC ). Furthermore, most suppliers to NHS bodies tend to be based within the UK. It is unlikely therefore that the proposed changes will alter the way in which NHS bodies receiving most services account for VAT on them. However, it may lead to an increase in services received on which VAT must be charged.
The Reverse Charge Procedure
NHS bodies currently receiving services such as consultancy, IT deveopment, accountancy, etc, from overseas suppliers must currently account for the related VAT using the Reverse Charge procedure. Under the Reverse Charge, VAT is calculated currently as 15% of the value of the services received. The VAT figure is added to box 1 of the VAT return, ( and the value to box 6 ). The procedure avoids the necessity for overseas businesses to register in another EU country when the recipient business ( the NHS body ) can account for VAT on the supply.
Going Forward
Following the changes, VAT on services currently received by NHS bodies, where the place of supply is determined by the location of the supplier ( e.g., clerical or secretarial services, management services, etc ), must also be accounted for using the Reverse Charges procedure. For example, a US based supplier of management services, not registered for VAT in the UK prior to the changes, making such supplies to an NHS body, does so outside the scope of UK VAT. Therefore, neither the US supplier, nor the NHS body would be expected to charge UK VAT to HMRC. If, following the changes, the US supplier were to make the same supply of management services to the NHS body, the NHS body’s status as the recipient would mean that it would need to account for VAT on the transaction under the Reverse Charge procedure.
Reverse Charge VAT Recoverable Under COS Rules
Where the VAT on specific services received by NHS bodies is typically recoverable by virtue of Contracted – Out Services VAT law, ( e.g, consultancy, clerical services, translation services, etc ), VAT which must be accounted for on their receipt under the Reverse Charges procedure can be recovered as Contracted – Out Services VAT, meaning no net loss to the NHS body receiving the services. However, the VAT incurred on the purchase of certain services, such as the temporary placement of doctors through agencies, will remain non-recoverable.
Changes to Scope of Application of Reverse Charge Procedure
The procedure itself shall not change as a result of The VAT Package proposals. However, as a consequence, it appears that the scope of its application will widen slightly. The reverse charge currently applies when the recipient of a service receives it for a business purpose, and accounts for VAT on the supply it receives. However, from 1 January 2010, an organisation that is involved in both business and non-business activities will have to account for VAT on a supply via the reverse charge, even if the service is received in connection with its non-business activity. Therefore this will have a bearing on NHS bodies where they receive most services for non- business purposes
Please feel free to contact us in respect of any of the details above.
CRS VAT Consulting has been working through a number of policy and technical issues with HMRC following submission of the Fleming VAT claims, with a view to getting these approved. Although HMRC are yet to pay out any of these claims to the NHS, they aim to settle all claims by the end of 2011. Furthermore, HMRC are hoping to settle a good proportion of the NHS claims by the end of the 2009/10 financial year, provided the issues have been resolved.
Points being considered include:
- Entitlement to claims – some Trusts and SHAs have sent in duplicates for the same periods as it has been suggested (incorrectly in our view) that the SHAs are entitled to make claims and not Trusts This is being considered by HMRC’s legal advisers.
- Dates from which retrospective ‘extrapolation’ has been started and method of extrapolation.
- The ‘quantum’ of claims including areas covered, realistic extrapolation methods, output tax liabilities, etc.
- Interest – HMRC are generally committed to paying ‘simple’ interest, however there is a strong case to argue that this should be paid ‘compound’. We are aware that some private sector Fleming claimants have already been paid compound interest.
- Lennartz – the whole policy of Lennartz and its retrospective treatment is being considered by HMRC policy and legal teams.
HMRC received a total of £260m Fleming VAT claims from the NHS; 25% of this value (£66m) was submitted by CRS VAT Consulting. HMRC have acknowledged that CRS VAT Consulting has taken a leading role in ensuring that the standard of claims submitted is technically robust. Specifically, we have been told that CRS VAT Consulting has ‘put in a lot more work than many’ in making sure the claims submitted stand up to scrutiny. We are therefore confident that a good proportion of our client’s claims will be paid in the earlier timeframe.
You will probably be aware that the VAT rate is due to revert to 17.5% with effect from 1 January 2010. Some opportunities may be available to benefit from the existing 15% rate, but “anti-forestalling” legislation introduced by HMRC in the 2009 Budget must be fully considered first. The aim of HMRC’s rules is to prevent purchasers of goods and services from taking an unfair advantage of the rate change. If you believe any of the transactions your NHS body undertakes or shall undertake need consideration in respect of the VAT rate reversion, please feel free to contact us.
Following are examples of how the rules shall apply:
- If goods are ordered, invoiced, delivered and paid for by an NHS body by 31 December 2009, it will not have to pay an additional VAT charge. Therefore an opportunity would exist for the NHS body to gain a VAT saving before the rate reverts to 17.5%.
- If an NHS body buys an equipment leasing contract or other services and an invoice is issued to it before 1 January 2010, then VAT should be charged at 15%. Provided that this is standard practice under the terms of the contract and payment is due within 6 months, there will be no additional 2.5% VAT charge.
- If an NHS body is engaged in an on-going construction contract (where VAT may not be eligible for recovery), it will be advantageous to ask contractors to issue invoices for work carried out up to December 2009 by 31 December 2009 so that it can be charged at the 15% rate. An advanced payment for future works could also be made (up to £100,000). (N.B., A pre-payment in excess of £100,000 which is made before the rate change (i.e. before 1 January 2010) for goods or services to be provided after the rate change, will attract an additional VAT charge of 2.5% unless it is in line with normal commercial practice ).
You can ask a supplier who raises an invoice after 31 December 2009 to split the invoice between the two rates on the value of the work undertaken before and after the rate change.
NHS Bodies Issuing Invoices
We would advise that in the build up to the VAT rate change date (31 December 2009) NHS bodies aim to keep their invoice issuing as up to date as possible. This will lead to them receiving payments sooner, and avoid difficulties which may arise if invoice issuing is delayed after goods or services are supplied.
In a further development of the VAT treatment of supplies of agency staff, HMRC have made available a draft business brief which aims to clarify their policy on the VAT treatment of supplies of health professionals, nursing auxiliaries and care assistants by employment agencies.
HMRC states that where an agency supplies registered health professionals such as doctors, dentists, physiotherapists (including locum staff) as a principal to a third party, e.g. an NHS Trust, it is making a taxable supply of staff and not an exempt supply of healthcare. This is on the basis that the health professional is working under the control and guidance of the third party and it is therefore the third party which is responsible for providing healthcare to the final patient, rather than the business supplying the staff which has no such responsibility.
The brief goes on to state that a taxable supply of staff is made even where the agency is responsible for ensuring that the workers it provides are properly trained and qualified when they work under the control of the third party.
A taxable supply of staff is also made where self-employed staff (such as doctors) are supplied to a third party, where there may be no other staff with medical knowledge. This is because, even if the third party cannot supervise doctors’ medical proficiency, it nevertheless controls where and how the doctors work within its institution and is ultimately responsible for providing the healthcare.
HMRC states that exceptionally, if an agency uses its staff to make a supply of healthcare to the final patient, it is providing healthcare which is therefore exempt from VAT, (although this is unlikely to happen in practice as employment agencies are generally in the business of providing staff to third parties rather than healthcare to patients).
Concession for Supplies of Nurses and Nursing Auxiliaries
By concession, agencies supplying nurses may still exempt supplies of nursing staff and nursing auxiliaries supplied as a principal to a third party provided the business is registered with one of the relevant statutory care institutions. This concession also extends to supplies of nursing auxiliaries provided they perform some form of medical care.
Is HMRC’s Policy Right?
The current VAT legislation states generally that VAT exemption for healthcare services is based upon the professional qualifications of the individual ‘person’ engaged in providing the service. This covers services of registered medical practitioners including doctors and nurses, midwives, etc under the same umbrella.
Furthermore, the legislation includes supplies of services made by a person who is not a registered health professional, but where the services are wholly performed or directly supervised by a person who is registered.
This would therefore suggest to us that an employment business providing medical practitioners should still be able to exempt its supplies, as it is the person supplying the services and the services are wholly performed by registered persons (i.e. the registered doctors, nurses, etc which are being supplied).
To state that this is a taxable supply of staff seems to go against the spirit of the legislation as VAT should only be levied on goods/services not covered by the exempt/zero/reduced rate schedules.
The suggested nursing agencies ‘concession’ could lead to an illogical situation where the services of an unqualified nursing auxiliary could be treated as an exempt supply of healthcare, but the medical services of a qualified doctor are taxed as a supply of staff.
How This Affects the NHS
Bearing in mind most of these types of supplies are made to the NHS, the concession for nurses is irrelevant as the NHS is currently allowed to recover VAT on nursing agency services under the contracted-out services rules. The NHS is not however permitted to recover VAT on doctors/locums.
HMRC have asked for comments on the draft legislation and we have made our points known to them, however as in previous consultations, we expect HMRC to issue the brief soon with no changes.
This will therefore have the effect of further increasing the level of irrecoverable VAT on agency staff, as some of the agencies which currently still do not charge VAT will presumably be forced to adopt this clarified VAT treatment.
CRS VAT Consulting is a firm of chartered tax advisers specialising in pro-active and innovative VAT solutions. Since 2002 we have grown to become a leading provider of VAT services to the NHS. We have achieved this by consistently identifying increased levels of VAT recovery and providing flexible services tailored to the specific needs of our clients.
Our credentials can be checked with the Chartered Institute of Taxation, which is the senior professional body in the United Kingdom concerned solely with all aspects of taxation.
In our last few NHS VAT updates, we have informed NHS bodies about the ‘potential’ changes to the contracted-out services (“COS”) VAT recovery headings, in particular heading 52.
There is still a great deal of uncertainty and speculation regarding the nature and timing of these changes, so in order to provide some clarity for our NHS clients we have sought to obtain some definitive guidance from HM Revenue & Customs (“HMRC”). The following is correct at the date of this publication:
- The revised COS heading 52 has been approved by HM Treasury, although it has not yet been published. HMRC do not known when the Treasury Direction will be published.
- The revised heading reads as follows: ‘Professional advice or opinion on departmental efficiency or policy issues, legal advice or opinion and internal audit’.
- When published, this heading will only allow VAT to be recovered on professional fees if they are of the type that fall within the definition above. This therefore seems to exclude professional services of architects, quantity surveyors and other advisers involved in capital projects. Services of solicitors and internal auditors will remain eligible for VAT recovery. Services of advisers relating to projects aimed at efficiency, cost savings and policy will remain eligible for recovery.
- It is not known if there will be a transitional period leading up to the change, however based upon previous Treasury Direction publications, this now seems unlikely. The rules are therefore likely to take effect immediately from the date of publication by the Treasury.
- Until the revision has been published, the current interpretation of COS heading 52 should be used.
In summary, HMRC are relatively certain that the changes will come into effect at some point, however they do not know when. Given the level of uncertainty, NHS bodies would be wise to consider including the VAT on professional fees as non-recoverable in future capital expenditure budgets.
In our view, the speculation surrounding these changes has left the NHS in an extremely difficult position. The wording of this new heading still seems ambiguous and open to interpretation and there are likely to be a large number of services on which the future VAT treatment will be unclear.
Please contact us if you wish to discuss how these important developments will affect you.