How health VAT works
Health VAT Issues
VAT Liability of Medical Services
When you provide health services in return for payment you usually make a VAT exempt supply. This means that although no VAT is charged there is a restriction on VAT recovery. In practice this is not an issue for most parts of the NHS. This is because they do not charge and are not regarded as being in business for VAT purposes.
NHS Divisional Registration
Most NHS bodies are covered by the NHS divisional registration. This allows them to provide services to each other effectively outside the VAT system. This is because persons within a VAT registration cannot as a rule make supplies to each other.
NHS Contracted Out Services Rules
Bodies within the NHS VAT registration are able to recover VAT under the Contracted Out Services (COS) rules. These allow VAT to be recovered when services are brought from third party contractors that could be provided in house. The policy objective for this is to ensure VAT doesn’t discourage the outsourcing of services within the NHS. For example, if a hospital was to employ in house cleaners then it would suffer little additional irrecoverable VAT. But if it decided to use outside contractors then it would. Without the refund rules the outsourced contractor would find it hard to compete.
Hospices and VAT
Hospices, with a few exceptions are not part of the NHS divisional VAT registration but separate charities. This means they have their own set of issues. The first VAT issue for a hospice must is whether it is in business in respect of its care provision. Although on average 2/3rds of hospice funding comes from donations and fundraising, the remaining 1/3rd is paid over by the state. The question is whether this state funding is paid under a contract for services. If it is then it will be payment for an exempt supply made in the course of business. If it isn’t then the activity will be non business. This allows VAT to be recovered using the hospice VAT refund scheme. Another problem for a hospice making an exempt supply is that it can lose its eligibility to some VAT reliefs.
Recent changes to the structure of the NHS mean that the standard agreement terms for funding third parties have become a lot stricter. Fortunately HMRC generally accept that where specific patients are not mentioned the funding can be regarded as outside the scope. This means that a hospices core funding is normally outside the scope. Their activities are therefore mainly non business. This allows recovery under the hospice VAT refund scheme.
VAT problems can arise in respect of patient specific funding such as that provided under Continuing Health Care Contracts. For more information on hospice VAT see Hospice VAT
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