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.