Another recent development is the launch of a consultation exercise by the EU Commission on the future of EU VAT rules for public sector bodies and activities in the public interest. As part of this exercise, the Commission has published a consultation document which sets out what it sees as the main issues, namely;

  • possible distortion of competition between public and private sector organisations, due to differential taxation;
  • complexity and lack of harmonisation, for example, difficulties in determining which supplies are taxable, exempt or outside the scope of VAT, and the disparity of EU and domestic legal provisions regarding terms such as ‘public authority’ and ‘body governed by public law’.

NHS organisations are treated as ‘public bodies’ under UK VAT law, and the possible distortion of competition between public and private sector bodies in the healthcare sector has already been the subject of a report by NHS regulator ‘Monitor’, published in March 2013. The report highlighted the differential VAT treatment of NHS organisations and charities bidding to provide NHS services, and recommended that these charities should also be entitled to claim VAT rebates.

This recommendation is echoed in one of the Commission’s options for reform, which involves the setting-up of a refund system at EU level. This would refund input VAT in respect of non-business and VAT-exempt activities, for both public bodies and private organisations carrying out activities in the public interest.

Another reform option suggested by the Commission is the elimination of special rules for public bodies, so that activities would be taxed or exempted according to their nature, and not according to the status of the body carrying them on.

The consultation document lists a number of questions which the Commission has invited interested parties to respond to, e.g. how they evaluate the existing rules, and what feedback they have on the suggested reform options. The deadline for the submission of responses is 14th February 2014.

The Commission first identified issues with the VAT rules for public sector bodies and activities in the public interest in its ‘Green Paper on the Future of VAT’ published in December 2010. It may therefore be some time before any changes recommended by the Commission are adopted by Member States, and in the UK, some of these changes may be pre-empted by the Treasury’s review of Section 41 of the VAT Act. We will issue another update when there are further developments.