NHS VAT refund changes: public sector collaborations to benefit

NHS VAT refund changes: public sector collaborations to benefit

In a major boost to public sector collaborations, the Treasury has proposed changes to the way NHS bodies and government departments (“GDs”) recover their VAT costs. If the changes are implemented, they will remove a major obstacle to collaboration and partnership arrangements between local, police and fire authorities and the NHS and GDs.

The activities of public bodies are mainly outside the scope of VAT, or “non-business”.  The VAT system does not allow the recovery of VAT costs related to non-business activities but there are special rules for local, police and fire authorities and the NHS and GDs.

NHS and GDs receive VAT refunds under section 41 of the 1994 VAT Act, but the refunds are restricted to certain defined “contracted-out services”; however, no VAT is refunded on the VAT cost of goods used for any non-business activities.

Local, police and fire authorities receive refunds under section 33 of the 1994 VAT Act, without any restrictions.

The Treasury proposal is that NHS and GDs will be allowed full VAT refunds in relation to non-business activities, akin to the refunds under section 33 of the 1994 VAT Act. This would mean that the VAT costs related to NHS and GD’s non-business activities would be recoverable without distinction between goods and services, and for all types of supplies received. (There will be restrictions on the recovery of VAT costs on the normal “blocked” supplies, and in relation to exempt business activities.)

If the proposed change is enacted, it will have major beneficial consequences for the collaboration and partnership arrangements of local, police and fire authorities and NHS bodies and GDs. The current refund mechanism in section 41 often prevents or complicates collaboration and partnership arrangements by creating irrecoverable VAT costs for NHS bodies and GDs.  Examples PSTAX has advised on include:

  • blue light service co-location projects, where the ambulance services participation were threatened as the VAT costs were prohibitive;
  • pooled budget arrangements between local authorities and NHS trusts;
  • partnership working between local authorities and CCGs; and
  • social care reform.

With a less-restricted VAT recovery for NHS and GDs, these types of issue will be avoided.

The Treasury will publish a policy paper soon, but in the meantime it has asked relevant stakeholders (such as NHS bodies and the HFMA) to provide it information about how much VAT is recoverable and irrecoverable under section 41.

The changes are intended to be fiscally-neutral, and the information requested is designed in part to allow future budgets to be adjusted to take account of the additional VAT refunds for the NHS and GDs that will arise from the proposal.

Nick Burrows


07805 449651

Peter Gladdish


07977 513735