Whilst there does not appear to have been an official announcement by them, HMRC have helpfully updated the guidance on COS Heading 14 Computer Services and COS Heading 71 Welfare Services on the online manual late last week. Whilst Heading 71 hasn’t provided much in the way of difficulties over the years, Heading 14 has certainly been an area of uncertainty for many.

The full guidance can be found on HMRC’s website, here:

https://www.gov.uk/hmrc-internal-manuals/vat-government-and-public-bodies/vatgpb9700

but we have summarised the key points for each heading below:

Heading 71:

It has been clarified that primarily this heading relates to welfare services supplied to the staff members of the NHS or Government department, though there are two exceptions:

Where a Government Department or NHS body has a duty of care towards:

– Prison inmates or
– Hospital inpatients

There will be a wider definition of ‘welfare’ in these instances and will include the provision of social work where necessary. This only applies for the period for which the person remains an inmate or inpatient of the NHS or Government department.

Heading 14:

We have been eagerly awaiting some further clarification on this heading as there have been areas which have been somewhat ‘open’ to interpretation – for example, what does ‘substantial modification’ mean?

There are still some points which open up further questions for recovery purposes and we are seeking to clarify these points with HMRC. However, in brief the key points to note are as follows:

• In order to qualify as bespoke software, a pre-existing software package can be ‘substantially modified’. ‘Substantial modification’ requires there to be changes which make the product ‘unrecognisable’ from its original state. These cannot be simply ‘customisation’ or ‘personalisation’ which tend to focus on data management/ input issues rather than actually remodelling the software.

• Standard software packages with minor modification at the implementation stage is not eligible for recovery unless it is supplied as part of an entire IT system.

• Where an IT system (which could be made up of several packages provided by different suppliers) has been built to the recipient’s specification, it will be eligible for recovery.

• Where IT services /staff are procured to assist with the implementation of such an ‘IT system’ and they are working under the direction of one of the suppliers (not the NHS) – this will also be eligible for recovery.

• The requirement that previously existed for a system to be fully managed by the outsourced provider no longer exists. The NHS is able to retain management in house if preferred.

If you do have any queries relating to the changes, please do not hesitate to contact your main consultant directly or via the Free VAT helpline on 01732 868266.