Changes to NHS and government VAT refunds: consultation

Changes to NHS and government VAT refunds: consultation

On 27 August HM Treasury (‘HMT’) published its long-awaited consultation about proposed changes to the VAT refund mechanism for the NHS and government departments.

VAT can be a significant barrier to public sector collaboration, and HMT’s preferred option could change this.




It has been recognised for a long time that the current rules are unnecessarily complicated, administratively burdensome, and a barrier to effective financial planning.

In the 2019 Spring Statement, the government announced that it would publish a policy paper exploring a potential reform to section 41 of the 1994 VAT Act (‘s41’). Government Departments (‘GDs’), the NHS, and Highways England, can reclaim under s41 the VAT they incur on certain outsourced services; s41 was introduced to remove a disincentive to outsourcing (which previously resulted in irrecoverable VAT costs for GDs and the NHS).

In the consultation paper, HMT has identified five areas where s41 has “introduced further complications and, in some cases, unfavourable incentives”. These are:

  1. Administrative burden
  2. Productivity
  3. Policy delivery
  4. Legal disputes
  5. National Crisis Response

For example, under 5. we are aware of several cases where a COVID-19 response involving local authorities and the NHS has been hampered by s41. Despite our VAT support and subsequent submissions to HMRC, s41 remains a barrier as HMRC is unable to provide an easement even in the time of national crisis.

Consultation paper


HMT’s preferred option is the ‘Full Refund Model’, which would permit full refunds of the VAT incurred on all goods and services relating to non-business activities. The local authority VAT refund mechanism (section 33 of the 1994 VAT Act – ‘s33’) is referred to in the consultation paper, and it is implied that this is the type of mechanism that HMT would prefer.

However, the consultation paper is vague on an essential aspect of a Full Refund Model – VAT costs relating to VAT-exempt supplies (‘partial exemption’).

It is only in the context of avoiding distortion of competition is there comment on reclaiming VAT costs relating to exempt supplies. This is a concern.

The partial exemption rules for s33 bodies are more generous than the standard rules; there is a higher de minimis limit (under which VAT relating to exempt supplies can still be reclaimed). If this is not mirrored in the reform to s41, many of the desired outcomes of the reform cannot be realised.

Also, the consultation paper does not mention the current divisional VAT registration for the NHS. It is not clear how or whether this would continue.

HMT suggests that reforms could take up to three years to implement. Moreover, HMT would not implement any changes to the NHS or related bodies until the COVID-19 crisis eases.

HMT welcomes views on the issues discussed in the Policy Paper and has invited comments before 19 November 2020.

No doubt there will be a response from representative bodies, and we recommend that all public bodies consider the contents of the consultation paper (link below) and contribute to the consultation process.

Alternatively, or additionally, we will be pleased to receive your comments if you would like us to include them in the PSTAX response to the consultation paper.

We will keep our clients informed of developments, but please contact us if you have any questions or comments.

The consultation paper can be found here:

HMT Consultation Paper on reform to VAT refunds for government departments, the NHS and Highways England

If you have any questions or comments, please contact:

June Wright 07538 518892