Potential reform to the VAT recovery rules for the NHS

Published 8 April 2019

In the Chancellor’s Spring Statement it was announced that in the coming months the government will publish a policy paper exploring a potential, fiscally neutral, reform to the VAT refund rules for central government, including the NHS, “with the aim of reducing administrative burdens and improving public sector productivity".  

Although the paper itself has yet to be published, it has already been announced that HM Treasury is looking at whether in future to refund all VAT incurred by NHS bodies in relation to their non-business activities but with a corresponding reduction in the departmental budget. This could mean that an NHS body would recover VAT on everything it buys, including agency staff, construction projects and purchases of equipment, drugs and consumables. However, the consequence would be that the comparative VAT benefits of direct engagement, managed service contracts, subsidiary companies etc. would disappear.

It is still early days and there has been no mention yet as to when any new regime would be introduced.

Preparing for any possible changes

There are, though, things it would be sensible start to thinking about now. These include:

• The potential impact on existing outsourcing contracts, and how you ensure you will have the contractual flexibility to exit such contracts should the changes go ahead, and should you feel the future commercial benefits of the contracts are outweighed by the costs.
• If you have established a subsidiary company, the possible impact on its business plan and financial model, given a similar overall VAT outcome would arise in future without it.

The rationale for any outsourcing under the regime that is being considered would seem to depend entirely on the commercial / operational / service benefits it delivers compared to the activity being undertaken by you in-house.

Request for data

You may have received a request from HMRC and / or NHSI for data to support the HM Treasury review. HMRC are asking for the following data for the year 2017/18 to be provided by 15 April 2019, and for permission to share this data with HM Treasury:

• Total irrecoverable VAT.
• Total recoverable COS VAT.
• Recoverable VAT by COS Heading.
• Total irrecoverable VAT on goods purchased.
• Total irrecoverable VAT on services purchased.

It is not completely clear how you should reflect any partial exemption adjustments in the data, as without this information the amount of irrecoverable VAT is likely to be understated.

The provision of the data is voluntary. You will, therefore, need to decide quickly whether you intend to supply data and, if so, how you will gather it in the short timescale alongside dealing with your financial year end.

HM Treasury has said that this data will only be used to give an early indication of the scale of the complexity and that further data will be required in due course (potentially including the years 2018/19, 2016/17 and 2015/16), before implementation can begin. The data will be essential in understanding the feasibility of a reform and exploring potential issues, and will ultimately be necessary to accurately adjust departmental budgets.

The possible financial impact for you

HM Treasury has stated that any reform would be fiscally neutral. We await the detail as to how the reform would be fiscally neutral at the level of each NHS body, given that there is not consistency as to the current VAT costs in each, and as to how fiscal neutrality would be achieved in the context of the current tariff and contracting arrangements.

It also remains to be seen whether the proposal is to use the irrecoverable VAT costs for a single year (such as 2017/18) as the basis for the adjustment to the departmental budget or whether an average across a number of years is to be used. The choice of the base period may determine whether there is an effective recapture of some or all of the VAT recovery resulting from, for example, the subsidiaries that have already been established or managed service contracts that have been entered into.

Next steps

If you would like to discuss the potential legal or VAT / financial implications for your organisation and how we can help you be as prepared as you can be at this stage for the effect of any changes that may result from the HM Treasury review, please contact us. Our details are below.

We can also talk through how we can support you in any contribution you want to make to the review, including the provision of data.

For more details, please contact DACB experts Anne Crofts or Louise Watson-Jones for legal queries; or PerkinsSmith Consulting expert Mike Perkins for VAT/ financial queries.