VATGPB9720 - Government departments and health bodies: Contracted Out Services (COS) Headings: COS Headings introduction
Bodies included in the VAT refund scheme in section 33E of the VAT Act 1994
Are there any exceptions to the normal claim period for COS VAT?
Can I adjust a COS VAT claim I have already made?
How do I interpret the Treasury’s Direction?
How do I request a new heading in the Treasury’s Direction?
Introduction
Government departments and health bodies have been encouraged to contract out services to the private sector which would have traditionally been performed in-house. It is recognised that many of these services would be subject to VAT and where they were acquired for ’non-business’ purposes, the non-reclaimable VAT could act as a disincentive to contracting-out.
It was therefore decided to compensate government departments and health bodies by a direct refund mechanism, which is provided for in section 41(3) of the VAT Act 1994. Under this provision, the Treasury issues a Direction, commonly known as the ‘Contracting Out Direction’ which lists both the government departments and health bodies that are eligible to claim refunds of VAT, and the services on which VAT can be refunded.
Originally there were separate lists of eligible services for each department/NHS body, but in the 1990s this was consolidated into a single list for all departments/NHS bodies. The ‘in-house’ requirement now applies across the government/NHS sector. As such you are not prevented from reclaiming VAT on the purchase of one of these services merely because you had never undertaken the activity ‘in-house’. Additionally, VAT can be recovered on services supplied by another department under a shared services arrangement if the service is listed in the Contracting Out Direction.
A full list of the services on which VAT can be reclaimed under the Contracting Out Direction can be found in VATGPB9700.
Qualifying bodies
The following bodies are eligible to claim VAT under section 41(3):
- Government departments and non-ministerial departments (including their executive agencies). These include:
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- NHS Trust
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- NHS Foundation Trusts
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- Clinical Commissioning Groups
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- Commissioning Support Units
- The Scottish administration, which comprises:
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- The Scottish Parliamentary Corporate Bod
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- Scottish departments and their executive agencies
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- Scottish non-ministerial departments
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- The Accountant in Bankruptcy
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- Disclosure Scotland
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- Education Scotland
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- The Scottish Public Pensions Agency
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- The Student Awards Agency for Scotland
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- Transport Scotland
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- Scottish Courts and Tribunals Service
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- The Mental Health Tribunal for Scotland
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- National Records of Scotland
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- The Parole Board for Scotland
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- The Scottish Housing Regulator
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- The Scottish Law Commission
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- Revenue Scotland
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- Food Standards Scotland
- The Scottish Charity Regulator
- The Welsh administration, which comprises:
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- The Welsh Government
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- Estyn
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- The Wales Office
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- The Welsh Revenue Authority
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- The Welsh Parliament
- The Government Communications Bureau
- Government Communications Headquarters
- HM Government Communications Centre
- The Secret Intelligence Service
- The Security Service
- The House of Commons
- The House of Lords
- The Privy Council Office
- Crown Non-Departmental Public Bodies, presently:
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- The Advisory, Conciliation and Arbitration Service
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- The Health and Safety Executive
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- The Institute for Apprenticeships and Technical Education
The Government of Northern Ireland claims VAT under section 99 of the VAT Act 1994.
Bodies included in the VAT refund scheme in section 33E of the VAT Act 1994
In 2016, section 33E was introduced in order to allow named non-departmental public bodies to recover VAT on certain purchases made to support their non-business activities. Refunds are currently limited to services listed in the ‘Contracting out ’Treasury Direction. For detailed guidance on the processes, rules and time limits for making claims under section 33E, and an explanation of the restrictions on what VAT can be recovered, please see VATGPB9650, VATGPB9650 also explains when you can start making claims if your application is successful.
When can I reclaim VAT?
Because refunds of VAT under this measure are met from public expenditure rather than VAT revenues, VAT should be claimed within the financial year in which the supply in question has been received - subject to a 3-month adjustment period, meaning the claim can be made no later than the June VAT return following the financial year end. By “the supply in question has been received”, we mean the tax point. While the tax point is normally the invoice date, this is not always the case. Continuous supplies may have a payment tax point.
In circumstances where you have received a supply on which no VAT has been charged by the supplier, and they subsequently issue you with a VAT only invoice, you can recover the VAT in the period in which you received the VAT invoice.
Are there any exceptions to the normal claim period for COS VAT?
In the following circumstances, you can make a claim outside the financial year in which the supply was received:
- Where HMRC has instructed a government department or NHS body that it cannot claim COS VAT on a particular supply and this turns out to be incorrect – in these circumstances, the four-year cap applies.
- Where a government department or NHS body has asked whether a supply it has received is covered by a particular COS heading, and by the time HMRC confirms that COS VAT is recoverable the time limits for claiming have passed – in these circumstances the four-year cap applies.
- Where there is uncertainty within the NHS (as a whole) or government departments (as a whole) whether, in relation to a particular service, COS VAT can be recovered and this is not resolved by HMRC until after the time limits for claiming have expired – in these circumstances the four year cap applies.
These exceptions only relate to events where HMRC or HM Treasury are the specific cause of the delay in making a claim.
Can I adjust a COS VAT claim I have already made?
The requirement to claim COS VAT within the financial year in which the supply is received is restricted to the actual claim itself. If a claim is made at the correct time, any adjustment to that claim must be made within the normal time limits for adjusting input tax (please see Notice 700/45).
For example:
- There may have been an error in the amount claimed (but an amount has to have been claimed).
- The price paid for the service in question may have subsequently increased or decreased (but the claim is still valid).
- The claim itself may have been subject to a further calculation, such as a ‘business : non-business’ calculation, which itself is adjusted at a later date because of a higher or lower non-business ratio.
Single/Multiple supplies
When considering whether a supply qualifies for recovery under one of the COS Headings, Government departments and NHS bodies should initially refer to guidance in the VAT Supply and Consideration manual to determine whether the supply they are receiving is a single or multiple supply. When this has been determined you should then consider whether the supply falls within one of the COS Headings and is eligible for recovery.
If the supply is a single supply, the predominant nature of the supply will determine whether it is eligible for recovery under only one of the COS headings. You cannot carve out different elements from a single supply in order to reclaim under different headings.
Where you receive a multiple supply, recovery on each separate supply can be considered for a possible claim under the appropriate COS Heading.
How do I interpret the Treasury’s Direction?
We have provided some advice and examples, but they cannot be exhaustive. The purpose of the Direction should always be considered - namely to ensure that what would otherwise be irrecoverable VAT does not dissuade you from contracting out a service to the private or voluntary sector. If the service you are purchasing was never performed within central government or the NHS, it is most unlikely to fall within the ambit of the Direction.
Section 41(3) of the VAT Act 1994 refunds VAT ‘if and to the extent that the Treasury so direct’. There may be occasions where the Direction is limited to a set of circumstances prevailing at a particular time. Where this has happened, we explain the position under the relevant heading. Some Headings are seldom used, or are bespoke to a particular department, and we do not provide explanations for these. Additionally, we ask you to continue to use the individual pieces of guidance to government departments and NHS bodies on Heading 52 for a short while longer as further amendments to the guidance for this Heading will be made soon.
How do I request a new heading in the Treasury’s Direction?
HM Treasury will consider requests for a new heading in the Direction, but please be aware that they will require a detailed business case from you. Please would you provide this to your Customer Compliance Manager (CCM) or if you do not have a dedicated CCM please send your application to the following email address: nhs.pbg@hmrc.gov.uk. Please note the submission of any information to this email address or any reply from HMRC is not secure from interception. The reply to your question(s) will only be sent to the email address that you provide if we can verify that you are authorised to receive the information you have requested. Our reply may include information that we hold about your tax affairs. If you do not wish to receive a reply by email please advise us and our reply will be sent to you by post to the address you provide.
Alternatively, please write to:
Wealthy/Mid-sized Business Compliance
HM Revenue & Customs
S1256
Newcastle
NE98 1ZZ
| What the Treasury will require | Why they need this information |
|---|---|
| 1. A full description of the service or activity in question. | To ensure that if your application is successful, the new heading accurately reflects the contracted-out service you will be receiving. |
| 2a. If it is an existing service or activity, how is it presently provided - for example, in-house, already outsourced, through an arms-length body | When Treasury are considering requests for new headings, they look at whether VAT will be a barrier to outsourcing and why outsourcing offers best value for money |
| 2b. What options are being, or have been, considered? For example, in-house provision, part in-house provision, phased outsourcing, full outsourcing | When Treasury are considering requests for new headings, they look at whether VAT will be a barrier to outsourcing and why outsourcing offers best value for money. |
| 2c. Why would outsourcing offer value for money? What are the financial, efficiency etc. benefits? | When Treasury are considering requests for new headings, they look at whether VAT will be a barrier to outsourcing and why outsourcing offers best value for money. |
| 3. An estimate of the VAT you will recover each year for the next five years if your application is successful. | Required for the purposes of the national accounts. |
| 4. The date from which you wish the new Heading to take effect. | To provide a timescale. Please be aware that you will need to wait for a new Treasury Direction to be published in the Government Gazettes, and the process for renewing a Direction can be a lengthy one. HM Treasury receives regular requests for new headings, which require Ministerial approval. |
How to use this guidance
To find out what is eligible for recovery under a specific COS Heading, go to VATGPB9700. This will provide a list of the Headings; you can then select the appropriate VATGPB link which will take you to the guidance for that Heading.
As with all lists, this guidance can soon become out of date because of the pace of change. It is important that our guidance reflects ongoing changes, and so we ask you to share these changes with us, and other departments and NHS bodies, as early as possible, so that the guidance can be kept updated.