VAT Review Services
During the last financial year (2021/22), we corrected in excess of £35m of VAT errors for NHS clients through our regular review services. This saved our clients potential VAT penalties and interest. The VAT savings identified through these reviews has been a welcome re-investment in the budgets of our clients.
IT contracts VAT support
HMRC’s COS VAT guidance is being continually updated to clarify their view on what types of IT supply are eligible for a VAT refund, in particular the meaning of ‘to the specification of the recipient’.
The current guidance states that the system/software should not be simply designed and built to meet certain perceived needs. There must be substantial involvement by the government department, NHS body or wider NHS in the supply or modification of the system beyond merely entering into a contract.
We have assisted many NHS clients in analysing IT procurement contracts in order to determine whether they meet the COS VAT recovery criteria. This has included quantifying aspects such as the initial design costs, associated software licences and hardware and ongoing running costs, in order to determine eligibility.
This has included agreeing VAT recovery on contracts for a number of clients such as:
o Electronic Patient Records (EPR)
o Virtual Desktop Infrastructure (VDI)
o Managed Network Services Infrastructure (NMSI)
We have very recently secured approval from HMRC for a VAT refund in excess of £1m for one client relating to a range of IT contracts. All of these contracts when linked together form an IT infrastructure built to the Trust’s specification. For the infrastructure to function, the Trust required iterations of standard operating systems which HMRC accepted as being sufficiently modified to meet to the NHS specification.
Business & Partial Exemption – HMRC Penalty Reduction
We were asked recently to review the business and partial exemption VAT calculations for an NHS Trust which had received VAT assessments in excess of £2m from HM Revenue & Customs.
The Trust’s business and partial exemption calculations had been calculated by another adviser, but HMRC had disputed the calculations, which eventually led them to raise the large assessment.
After a detailed review of the income and expenditure of the Trust over the periods in question, we were able to agree calculations with HMRC which reduced the assessments to a figure below £160K.
Managed Service Contracts
There is a general misconception within the NHS that all contracts which are described as ‘managed services’ are eligible for VAT recovery. This is not necessarily the case. A contract is only eligible for VAT recovery under the NHS contracted-out services (COS) rules if the services are of a type listed in the Treasury Direction and within the guidance published by HMRC.
We have helped many NHS Trusts and several suppliers of services to determine the correct VAT treatment of various managed service contracts. Typically, this has involved reviewing the principal elements and whether these meet the guidelines. We also consider various other aspects such as ancillary or integral supplies, levels of ‘labour and expertise’ and guarantees of availability in order to determine the correct VAT treatment.
We have recently conducted VAT training workshops for NHS procurement staff at various locations in order to transfer our knowledge in this critical area of NHS VAT.
Subsidiary Pharmacy Company
We have recently advised several NHS entities on the VAT implications of setting up subsidiary companies for the outsourcing of pharmacy activities.
Our advice included outlining the VAT implications, with regard to the establishment by the Trust, of an independent pharmacy trading company to operate on the Trust’s site and which will be responsible for the purchase of drugs and their dispensing to outpatients on prescription for their own self administration at home.
VAT implications included:
- Lease of the Pharmacy premises
- Service Charges
- Drug Purchases and supplies
- Staffing issues
- Capital expenditure including Pharmacy Robot
- Pharmacy company set-up and VAT registration
- Dispensed drugs delivered to Trust’s premises
- HMRC approval
VAT Implications of a Building Purchased by a Mental Health Trust
We recently advised a mental health Trust on the VAT implications of purchasing a building for £6.8m which had been constructed in the last four years for residential purposes and was being purchased by the Trust for conversion to a mental healthcare unit. The vendor of the property had previously achieved zero-rating VAT relief on the construction of the property for residential use and had asked the Trust to sign a contract confirming that the Trust would continue to use it for this purpose. Because of the ‘clawback’ rules on the change of use of a building within ten years of its construction, the Trust would have been liable to a potential VAT charge exceeding £700K had it not sought our advice to alter the clauses in the contract, putting the onus on any VAT.
Zero-Rated Catering/Cold Take-Away Food
We have conducted many reviews of Trust catering income in order to identify a percentage of takings which can be zero-rated for VAT purposes.
This involves liaising with catering managers to determine the level of sales records kept, i.e. whether they itemize takings by types of meals, etc, also whether they have till systems where the till staff can differentiate the types of meals/food sold.
These reviews have resulted in retrospective refunds and subsequent future VAT savings.
Consultancy Work for Property Transactions
We were recently asked to provide VAT advice on the redevelopment of an existing mental health Trust building into a museum and archive centre, to be operated by an associated charity.
Our work involved advising on the VAT implications and treatment of:
- Supplies by the Trust to the charity – reviewing the revision of Section 41(A) VAT Act 1994 to determine whether transactions were business supplies or outside the scope of VAT.
- Museum Staff – reviewing the employment status and payment of salaries to determine whether there are supplies of staff between the entities or whether employment status meant that transactions were outside the scope of VAT.
- VAT incurred by the Trust on the redevelopment/refurbishment works – to determine whether VAT incurred was recoverable as business input tax, blocked from recovery, or eligible for recovery under the appropriate COS regulations.
- Charitable Funds – Zero Rating
- VAT treatment of supplies by the Charity
Our work resulted in the Trust and Charity successfully mitigating several £100K of VAT costs.
PET/CT Scanner – Charity Funded Proposed Development
We provided detailed advice to a Trust and an associated Charity to identify and quantify the VAT implications with regard to the proposed development by the Charity to construct, equip and provide a PET/CT scanning facility on the hospital site.
The aim of the Charity was to develop a PET/CT facility on the Trust’s site at an estimated cost of £2m for building works and £1.7m for equipment.
The facility was owned by the charity which entered into a ground lease with the Trust. From the opening of the facility from April 2013 to April 2015, clinical services were provided by a third-party healthcare provider. The service will be tendered from April 2015 and awarded to the same or a new provider, which could be the Trust. The Charity would lease the facility to the provider.
The scope of our advisory work included (but was not limited to) consideration, review and advice in respect of:
- The VAT status of the Charity, in terms of its registration(s), etc
- Potential for any charitable VAT reliefs that may be available
- VAT liability of supplies to be made by the Charity to the Provider
- VAT treatment of other activities of the Charity which may have an impact
- Land & property VAT issues of all parties
- VAT liability of the Provider’s supplies
- Potential for VAT recovery by the NHS end users (e.g. under COS rules or as input tax)
- VAT treatment of supplies made by the Trust to the Provider or Charity
- Impact of supplies made by the Trust on the Trust’s overall VAT position
- Meeting with relevant Trust and/or other parties
- Reviewing current/proposed contracts and proposals
- Written report outlining our advice, options, etc
- Correspondence with HMRC and/or negotiations with HMRC
- Obtaining HMRC approval as necessary
Business Case of Outsourcing
We have provided VAT advice on behalf of an organisation which required advice setting out the VAT implications to both its Administrative hubs in both their partnership arrangements and future autonomy, and the potential VAT impact to their branches when procuring services under such arrangements.
Based upon our understanding of the executive agency, its Administrative hubs and its branches, we identified several different supply-chain ‘scenarios’ for consideration of different VAT treatments based upon the relevant VAT regulations applicable.
Based on current status, the Administrative hubs provide services to the branches under NHS VAT division and S41 status. The Administrative hubs in turn are currently able to recover VAT on certain costs under the Section 41 COS rules.
We have been able to advise in a written outline report which clarifies the relevant NHS and non-NHS VAT rules which has included some of the following VAT issues:
- Current VAT liability of supplies purchased
- VAT status of supplies by Administrative hubs to their branches
- Eligibility for recovery of VAT on certain supplies under the Section 41 COS rules
- Eligibility for recovery of VAT as business input tax
- Differences between recharges of costs net or gross of VAT, depending upon circumstances
- VAT treatment of specific property, utility of telecoms services
- VAT treatment of specific staff related transactions (agency, interims, etc)
- Other VAT issues as applicable (e.g. capital good scheme or partial exemption adjustments)