VAT on NHS outsourcing: overlook at your peril
Recent news reports of an NHS Trust which has been saddled with a painfully large ongoing VAT liability from its participation in outsourcing arrangements are a timely reminder that VAT rules will always need to be taken into account when structuring, pricing and drafting outsourcing contracts.
The core activities of NHS bodies carried out in accordance with statutory responsibilities are, in general, “non-business” activities for VAT purposes. Many other activities of such bodies are “business” activities for VAT purposes, and the range of activities typically includes both VAT-exempt activities (which carry no right to recovery of VAT incurred on associated costs) and taxable (standard-rated or zero-rated) activities. In the absence of special rules, bodies carrying on non-business activities have no right to recover VAT they incur on the costs of such activities.
However, for certain limited categories of contracted out service, the Contracted-out Services (COS) rules, contained in Directions issued by HM Treasury, provide for such VAT to be repayable to the relevant NHS body. Where an NHS body is the customer under such an arrangement, unwelcome shocks can be avoided by taking specialist professional advice on the detailed terms of the COS rules and how to bring the outsourced services within them.
Where an NHS body is itself supplying services under an outsourcing arrangement a number of factors will be relevant to the VAT position.
First, are such supplies being provided directly between members of the NHS VAT group? In that case, the supplies can normally be disregarded for VAT purposes. But if the answer is “no”, because the services are being supplied via a third party outside the NHS VAT group (such as a private sector healthcare provider), then the supplies will be within the VAT system.
Some such services will be VAT-exempt under the health care VAT exemption, but by no means all such services. So it will be crucial to take advice on whether arrangements can be restructured so as to have the supplies made directly within the NHS VAT group instead, and, if that is not possible, to take advice on which of the services are taxable. That question will turn not just on the nature of the individual services supplied but also on the extent to which, in the particular circumstances in question, VAT case law requires services to be treated as a single “composite” package supply with a single VAT treatment governed by its dominant element, rather than a series of separate supplies with differing VAT treatments.
Most important of all, the contract with the outside party should be drafted so as to entitle the NHS body (by way of a simple “plus VAT “ clause) to add VAT on to the charges which it makes for its services, so that the cost is picked up by its customer.