HM Revenue & Customs (“HMRC”) has recently issued a letter to NHS bodies stating their policy on contracted-out services (“COS”) VAT recovery on leased equipment.

In summary, this simply re-iterates the rule (which we included in our newsletter of July 2011) that NHS bodies are only permitted to recover VAT on the maintenance of leased equipment (under COS heading 37) where the maintenance is provided by a separate supplier to the one providing the lease hire.

The key point is ‘separate supplier’. Separate charges or separate invoices from the same supplier of the lease hire do not qualify.

Although not explained in the letter, the reason for HMRC’s stance on this is that the supply of services within a lease package is considered economically not dissociable from a supply of the hire of the goods. In essence, VAT recovery on the service element is inappropriate because what is being supplied constitutes a ‘single supply’ of the letting or hire of goods.

If you currently have, or are looking to enter into any lease contracts with maintenance, we would be happy to provide our advice to legitimately save VAT costs with these types of arrangement.