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.