February 2005

MONTHLY NHS VAT NEWS BULLETIN

Contents

1. Advertising
2. VAT recovery on leased accommodation - Heading 53
3. Business activities input tax recovery

1. Advertising

Customs & Excise have recently announced that placing direct advertisements in newspapers, magazines, etc. is not eligible for VAT recovery under the contracted-out services rules. Although Customs insist that this is simply clarification of existing rules, it will be news to most NHS organisations that have always recovered VAT on these services.

Customs have however stated that the provision of advertising is still eligible for recovery under item 57 of the COS headings if provided as part of a package of services by a third party.

To clarify, we have confirmed with Customs that using the services of an advertising agency does still qualify for VAT recovery.

2. VAT recovery on leased accommodation - COS heading 53

Since December 2002, heading 53 of the contracted-out services list has stated that VAT is recoverable on the 'provision under a PFI agreement of accommodation for office or other governmental use, together with management or other services in connection with that accommodation'.

Customs NHS policy unit are however still considering the circumstances under which NHS organisations can recover VAT on leased accommodation.

Since this heading came into force, it is our understanding that VAT on leased accommodation which is 'similar' to a PFI agreement is also recoverable. In this context, similar to a PFI agreement means that NHS organisations simply occupy accommodation and all the services relating to the building are provided by the 'landlord' under a single supply agreement.

Customs' Business Brief 18/03 published in September 2003 describes 'Composite Trade' and 'LIFT' arrangements as being PFI arrangements which are eligible for VAT recovery subject to the usual conditions. This is on the basis that these are also 'similar' to PFI.

This wider interpretation of heading 53 is still being reviewed by Customs NHS policy branch and there is likely to be further clarification and guidance in the future. In the meantime, if your NHS organisation is occupying or is intended to occupy leased accommodation, there may be scope for VAT recovery. There is however no blanket approval to recover VAT on leased accommodation either as part of PFI, LIFT, Composite Trade or otherwise. We would therefore ask that you seek our advice before any VAT is recovered.

3. Business Activities Input Tax Recovery

Customs will shortly be issuing further guidance regarding the attribution of costs when calculating VAT recovery on business activities. This is following concerns that direct attribution is only being done to a limited extent which possibly results in over recovery of VAT which relates wholly to non-business healthcare activities.

We have therefore been working very closely with Customs recently in order to ensure that our working methods for business and partial exemption reviews are acceptable. As such, we have developed a range of improved analysis techniques which aim to maximise direct and indirect input tax recovery and minimise partial exemption exposure and at the same time are considered 'fair & reasonable' by Customs.

This does however mean that we ask our clients for a bit more information than before to complete these reviews, however we can demonstrate the value of this by identifying more accurate VAT savings which are agreed by Customs. Furthermore, we continue to carry out 're-reviews' of business and partial exemption where a review has already been carried out by previous VAT advisers and to-date we have identified in excess of £1.25M of additional savings. Proof that not all VAT advisers are the same!

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