As stated in an earlier newsletter, HMRC have been considering their policy concerning the interaction of the NHS COS VAT rules (in particular, COS heading 26; Hire of vehicles including repair & maintenance), and the 50% blocking order VAT restriction on lease cars (applicable to the car lease but not the maintenance). This review is in light of the changes to the salary sacrifice VAT rules, where, subject to transitional arrangements, schemes have been treated as business supplies since January 2012.

Under the normal business VAT rules, 50% of the input tax incurred on the lease of a car is blocked from recovery. This means that a fully taxable business which is generally able to recover all of its VAT can only recover 50% of the VAT on a lease car. The ‘blocking order’ also applies to partly exempt businesses, where 50% of the VAT is blocked and the remaining 50% of ‘allowable’ VAT must be taken into account in the partial exemption method.

HMRC’s published guidance states that where a business which has blocked input tax makes a car available for private use of an employee for a charge, output tax need not be accounted for.

We have been informed that following consultation, HMRC are looking to apply this rule to NHS bodies making cars available to staff under a salary sacrifice agreement. This will presumably mean that the salary sacrifice amount will be deemed ‘outside the scope’ of VAT, rather than a taxable supply.

What this should mean (although not yet confirmed by HMRC) is that the remaining 50% of input tax which is not blocked will go into the Trust’s business/non-business and PE method, meaning in most cases, the vast majority of the VAT will be recoverable under COS heading 26. HMRC have not yet commented on the treatment of the VAT on the maintenance element, although presumably 100% of this VAT will be treated in the same way as the 50% of the lease VAT.

Hopefully, HMRC will publish their revised guidance shortly.