For a number of years HM Treasury have been considering potential reforms to the Contracted-Out-Services – numbered 1 through to 76 – which you will be familiar with from our reports.  As a quick recap these rules [Section 41 VATA94] are the mechanism with which NHS and Government Departments (GD) reclaims VAT on certain outsourced services.

The much anticipated ‘VAT and the Public Sector: Reform to VAT Refund Rules‘ paper has now been released by HM Treasury and can be found here. HM Treasury’s preferred option is to extend the scope of Section 41 to permit full VAT reclaims on all goods and services purchased in the course/furtherance of non-business activities and move towards a ‘Full Refund Model’, with a view of simplifying VAT accounting; resulting in an additional £10-15 billion VAT refund to the NHS and GD’s.

With the release of the paper, a consultation has opened and HM Treasury are welcoming views on the proposed reform, and BBVAT will be submitting a response to the consultation taking into account the views of our NHS Clients. We would welcome your views/comments/concerns and have highlighted the following aspects that could be considered as part of the response:

• Would the NHS realise any benefit through the expected £10-15 billion of additional VAT refunds? How may NHS budgets be impacted and will it have the same effect on every NHS organisation and how will any change be calculated?

For example, how may HM Treasury estimate (for funding purposes) how much an NHS organisation may have recovered? If this is calculated based on average VAT recovery in the NHS, it is possible that those NHS organisations which took a more conservative approach to VAT recovery and did not recover as much as their peers, may face a disproportionate reduction in their budget than those which recovered a greater proportion of VAT.

• Would a ‘Full VAT Refund Model’ (in certain circumstances) create an unfair playing field where the NHS may tender for/provide NHS services in competition with the private and not-for-profit sectors?

• The current COS mechanism incentivises the outsourcing of certain services, would this reform remove a major advantage to outsourcing services and create inefficiencies within the NHS?

The consultation ends on 19th November 2020, and we would therefore encourage you to respond with your thoughts/questions at the earliest opportunity with a view to incorporating into our response.

Thank you in advance and should you have any questions please do not hesitate to contact us here