As outlined in previous updates, we are in the process of submitting ‘Fleming’ VAT claims for NHS Trusts prior to the 31 March 2009 deadline. HMRC accept that any claim will be based upon estimating/extrapolating more recent accounts information and we have a range of methodologies and practices in place to extract the relevant information and formulate a realistic claim relating to a number of key areas.
Some of the claims that we have submitted so far have exceeded £1m.
If you have not yet considered whether a Fleming claim is relevant for your NHS organisation, please contact us as soon as possible. We would be more than happy to visit at short notice and formulate a claim prior to the deadline.
HMRC recently issued a Revenue and Customs Brief explaining their change in policy on the VAT treatment of excess charges for car-parking.
Previously, HMRC considered that in non-local authority car parks (including NHS operated car-parks), excess parking charges were additional consideration for a supply of parking and therefore subject to VAT. However, they have now reconsidered their position and state in the Brief that:
…where a car park operator makes an offer of parking under clear terms and conditions, setting punitive fines for their breach, the fines constitute penalties for breaching the contract, rather than additional consideration for using the facilities.
The result of this is that many excess car parking charges will be treated as outside the scope of VAT for all car-parking operators including NHS organisations.
Excess Charges Not Subject to VAT
The penalty charges that will no longer be subject to VAT are those that are levied where a driver is in breach of the terms of the contract. The commonest situations where a driver may be in breach of the contract are:
- no parking ticket on display
- underpayment
- overstaying purchased parking time
- returning within a specified time
- parking outside marked bays
- parking in bays set aside for disabled drivers or parents with children
Excess Charges Subject to VAT
Where the terms and conditions make it clear that the driver can continue to use the facilities after a set period upon payment of a further amount without being in breach of the contract – for example, no charge for an initial three hours parking but £40 if that period is exceeded – then the payment will be consideration for use of the facilities and subject to VAT.
Going Forward
From now on, income from car-parking should be split in order to identify the non-taxable excess charges and VAT should only be declared on the taxable charges. If Trusts have accounted for VAT on excess car-parking charges in the past, (which is likely), it will be possible to make a claim for the overpaid tax, subject to the three-year cap. There may also be scope to submit a further claim for overpaid VAT under the ‘Fleming’ rules, i.e. relating to car-parking income up to 1997.
HMRC have recently announced changes to its management of tax for Public Sector bodies including some of the larger NHS bodies. They have created a new national team within local VAT office compliance and have appointed Customer Relationship Managers (“CRMs”), who will be responsible for the day-to-day contact between HMRC and Trusts with a view to improving communication and tax compliance.
We have discussed these developments with the current national NHS VAT Team within HMRC and can confirm that they will still be dealing with technical VAT issues for the NHS, however in some instances the direct contact may be via the CRM.
Changes which came into effect from 1 May 2007 meant that certain medical services which were previously treated as exempt from VAT became subject to VAT at the standard-rate. We announced in our previous bulletins that these changes affected NHS Trusts which generate non-NHS business income from activities such as clinical trials or occupational health services.
One of the most relevant areas of change for the NHS was ‘post-mortem examinations and reports’ provided to coroners, which became fully taxable from 1 May 2007.
Some NHS bodies may still not have changed their VAT treatment of this income and this may result in HMRC assessing for the undeclared output tax to-date. As this income is usually invoiced to councils and local authorities which are able to recover the VAT, Trusts would be advised to consider issuing additional invoices for the VAT not charged to-date and start declaring VAT correctly in the future.
This change in VAT treatment also creates a right to recover input tax on certain costs associated with this income generation area.
As outlined in the pre-budget report, the standard rate of VAT will fall from 17.5% to 15% for a thirteen month period from 1 December 2008 to 31 December 2009, when it will return to 17.5%.
Any sales of standard-rated goods or services that take place on or after 1 December 2008 should be at the new rate of 15%. There are no changes to sales that are zero-rated, at the reduced-rate (5%), or exempt from VAT.
There are a number of issues to consider concerning the tax point (time of supply) and whether VAT is charged at the old or new rate, in particular for supplies spanning the rate change. For the NHS as a purchaser, it is particularly important to ensure that you are not charged more than you need to be if the VAT is a cost to you, i.e., where the VAT is not recoverable.
It is also important that your accounting software is adaptable to take account of the changes both in terms of expenditure (purchases) and business income generated (sales).
Expenditure
Any invoices received from your suppliers from 1 December 2008 must show the new 15% VAT rate for standard rated items, except:
- where the goods or services were received more than 14 days before the invoice was issued, for example if you are invoiced on 1 December for goods or services received before 18 November 2008, or
- you paid for the goods or services before 1 December 2008
In these cases, the standard rate of 17.5% still applies. You may therefore still receive some invoices from suppliers after 1 December showing 17.5% VAT but it is important to ensure that these are valid and not simply errors by your suppliers.
Pre-Payments or Invoices in Advance of Delivery
If you have been invoiced or you have paid for goods or services in advance (i.e. before 1 December) and the goods/services are to be delivered in December or later, the supplier can elect to use the date of delivery as the tax point and charge VAT at 15%.
Where a tax invoice has been issued before the rate change and you wish to take advantage of the 15% rate of VAT in these circumstances, a credit note must be issued by the supplier.
One-Off Supplies of Services
The default tax point for a one-off supply of services is the date of completion. Under normal circumstances, this is overridden if it is preceded by a tax invoice or payment. However, if services are performed over a period that includes the date of change, suppliers can elect to apportion the work to reflect the amount that is appropriate to the new VAT rate.
Stage Payments
If you are making stage payments for long contracts, such as construction schemes, the relevant date for VAT is normally when a VAT invoice is issued or a stage payment is made. So any invoices received for stage payments on or after 1 December 2008 must have VAT accounted for at 15%, even if some of the work was performed before 1 December.
Business Income
Invoiced sales
The same basic time of supply rules as above apply to ‘invoiced’ income generated by the NHS, e.g., sales of drugs to private hospitals.
It will be necessary to make sure your accounting systems and software can be adapted to account for VAT at the new rate.
Cash sales
Cash income, e.g. catering, car-parking, vending, etc., received from 1 December will be at the new rate of 15%, so the VAT fraction to be applied to gross takings should be 3/23rds (not 7/47ths).
As outlined in our previous updates, the VAT staff-hire concession which is currently in place allows certain supplies of temporary workers by employment businesses (agencies) to exclude the wages element when charging VAT, i.e. VAT is only due on the commission (unless the commission turnover is less than the VAT registration threshold).
Some employment businesses have historically chosen not to apply the concession and have charged VAT on the whole value of their supplies, whereas others including many nursing and medical staffing agencies have adopted the concession. It was announced in the March 2008 Budget that this concession will be withdrawn from 1 April 2009, meaning VAT will be due on the full value of staff supplies by all employment businesses.
Historically, NHS bodies have always recovered the VAT on all agency staff with the full knowledge of HMRC, however over the last couple of years HMRC have tightened up on VAT recovery on agency staff under the contracted-out services (“COS”) rules. NHS bodies are still able to recover VAT on supplies of nursing staff (including non-qualified nurses, healthcare assistants, etc.) under COS heading 41 and admin/clerical grade staff under COS heading 69. VAT cannot be recovered under any COS heading on the supplies of any other staff provided by an agency, such as doctors, locums, consultants, social workers, physiotherapists, senior IT staff, senior finance staff, etc.
With regards to nursing staff and admin/clerical staff, the removal of the concession will only represent a cash-flow disadvantage because the additional VAT charged is still recoverable.
The removal of the concession will have a detrimental effect of increasing irrecoverable VAT on supplies by agencies which use the staff hire concession and which supply staff that are not eligible for VAT recovery. This is particularly applicable to locum and other healthcare staff agencies, where use of the concession is widespread.
It would therefore be prudent to assess the impact on your 2009/10 budgets and plan accordingly by:
- identifying which staff employment agencies you use
- identify which agencies currently adopt the concession
- differentiate between VAT recoverable and VAT irrecoverable staff supplies
- assess the potential increase in irrecoverable VAT
In our April update, we informed NHS bodies about some potentially wide sweeping changes to the COS recovery headings. The current Treasury Direction on COS VAT recovery has not changed since December 2002, however HM Treasury has been ‘reviewing the situation’ concerning the list for a couple of years now. In advance of any revised Direction being published, HMRC announced changes last year to COS heading 14 and COS heading 37 with immediate effect.
It is widely expected that if or when the new list is finally published, there will be further restrictions to VAT recovery on agency staff, with the possible removal of COS heading 69. Also, COS heading 52 is rumoured to be clearly worded to restrict VAT recovery to a limited range of advisory services only.
This puts the NHS VAT regime more in line with other Crown bodies. Other speculation (although not confirmed) is that partial recovery of services such as quantity surveyors and architects would be in line with the proportion of VAT recovery on related capital projects.
We liaise constantly with HMRC regarding NHS VAT matters and can confirm that there is currently no date set for these changes to take effect. Any suggested dates for the implementation of these new rules is pure speculation at this point and HMRC expect that there is likely to be a notice period to allow NHS bodies to budget for the changes.
There is no need to act at present with regard to these potential changes as they will not affect budgets immediately. Going forward, it may be prudent to allow a contingency for the possible non-recovery of VAT on these headings. Until the direction is published NHS bodies should continue to apply the headings currently in force.
In our January VAT update, we wrote about the House of Lords judgement in the cases Conde Nast and Fleming, which obliged HMRC to now repay VAT refunds accrued but not claimed for periods before 1996 right the way back to when VAT was introduced in 1973.
HMRC have since confirmed that this relates to underclaimed input tax and overpaid output tax. This represents an opportunity for NHS organisations to submit claims in areas such as private patient drugs (input tax) or cold take-away food (output tax) for these periods. Other areas are likely to be limited.
Realistically, due to the time lapsed and constant restructuring of the NHS over the years there are several ‘hoops’ to jump through in order to prove that a valid claim exists. There is however certainly scope for NHS bodies to submit claims and the potential values are likely to be higher for acute Trusts which traditionally have more business income.
This is something that CRS VAT Consulting is doing for all of our clients but we would be happy to hear from other interested NHS bodies with a view to submitting a claim on your behalf.
HMRC accept that any claim will be based upon estimating/extrapolating more recent accounts information. We have a range of methodologies and practices in place to extract the relevant information and formulate a realistic claim.
All claims need to be lodged with HMRC by the end of March 2009, so please contact us as soon as possible.
NHS bodies or their charitable trustees often embark upon fundraising events. The VAT treatment of these events is an area which can often cause confusion and there are some circumstances where VAT exemption is appropriate for supplies but this is not always the case.
Generally, VAT exemption only applies to those events which are promoted as being held primarily to raise funds. The exemption does not extend to regular trading activities but covers a variety of events such as a ball, annual lunch or dinner dance, etc. For example, an event of the same kind held 15 times or more in a year in the same location does not qualify for VAT exemption.
Charity ‘challenge’ events such as walking, cycling and other sponsored events to raise funds are likely to be affected by recent changes announced by HMRC. The types of events which are affected include those which are arranged to include travel and accommodation and require the participants to raise a minimum figure in order to participate. Although the changes took place on 31 July 2008, where events have been publicised or contracts have been entered into before this date the old rules should still apply.
Fund raising events that include a package of both travel and accommodation or more than 2 night’s accommodation do not qualify for the fund-raising exemption and are therefore subject to VAT.
Please contact us for further details if you think that this affects your NHS body.
‘Imminent’ Changes
The current Treasury Direction on COS VAT recovery has not changed since December 2002, however HM Treasury has been conducting a ‘review’ of the list for at least a year. In advance of any revised Direction being published which has been ‘imminent’ for some time now, HMRC announced changes last year to COS heading 14 and COS heading 37.
It is widely expected that when the new list is finally published, there will be further restrictions to VAT recovery on agency staff (COS heading 69) and professional services (COS heading 52). In particular, COS heading 52 is rumoured to be clearly worded to restrict VAT recovery to a limited range of ‘advisory’ services only.
Until the direction is published, NHS bodies should continue to apply the headings and HMRC interpretations currently in force.
COS Heading 41
Further to previous newsletters, HMRC and HM Treasury are currently reviewing heading 41 with a view to determining (once & for all) which staff fall within this heading. While the review is in progress, NHS bodies may continue to recover VAT on nurses, nursing auxiliaries, and nursing/healthcare assistants.
This represents a slight widening of the previous ruling in that VAT recovery can be extended to non-qualified nurses/healthcare assistants as well as qualified nursing grades.
If NHS bodies have previously restricted recovery or had VAT disallowed by HMRC for these services, you may recover the restricted VAT on the next appropriate VAT return. Remember that corrections to COS VAT incurred in the 2007/08 financial year must be claimed before the end of June 2008.