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Confusion over VAT recovery rules in public sector

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12th May 2014
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NHS bodies have been given a reprieve from an estimated £500m tax bill after confusion over rules allowing public bodies to recover VAT paid on outsourced services, according to Baker Tilly.

New internal guidance from HMRC to government departments and NHS bodies could impose a more restrictive VAT recovery on contracted-out capital expenditure, agency staff and professional services, Baker Tilly said.

The idea is that all public bodies will be subject to the same rules on VAT recovery under section 41 of the VAT Act.

In the past few years, however, some government departments have interpreted the VAT rules differently than the NHS. Consequently, some government departments have been able to recover less VAT than the NHS in the past few years, according to David Wilson, VAT associate director at Baker Tilly.

When HMRC said that NHS should interpret the VAT recovery rules in the same way, the NHS objected and asked to be consulted before the guidance was changed.

“The worry is that NHS would have to cut services if it is able to recover £500m less VAT than anticipated,” Wilson said.

Until the VAT guidance is finalised NHS finance staff may find it hard to account for outsourced services.

An HMRC spokesperson said: “We realise that asking the NHS to rely upon the guidance originally written for departments was, in a few situations, confusing for them and we quickly took steps to resolve this.”

HMRC will work with government departments and the NHS to produce one source of guidance that will meet everyone’s needs, HMRC said.

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