VAT relief for the public sector

In the Budget the Chancellor announced that existing VAT rules will be amended to refund the VAT incurred by certain bodies in specific circumstances. Those affected include public bodies that enter into shared services arrangements, palliative care charities and medical courier charities.

This will provide welcome savings for some bodies, as the changes will allow VAT that is currently irrecoverable to be recovered in full. It could also help to ensure that public funding is used more effectively and by more organisations.

There appears to have been an overall policy or drive for more public bodies to enter into shared services arrangements. Where this happens VAT is normally charged to the purchasers of the services. To date these services have mainly been in the fields of HR, recruitment and training, and IT services. The new changes will allow VAT incurred to be recovered, which until now has not been possible. With the expected wider take-up of shared services, this should ensure that shared service bodies are not at a VAT disadvantage when they enter into services arrangements. Due to competition issues, this change will also be extended to include situations where eligible services are procured from a private sector provider.

The provision of care by palliative care charities is not a business activity for VAT purposes where the cost is met from voluntary donations and public funding, rather than from fees. The VAT incurred on associated purchases is currently an irrecoverable cost. Legislation will be introduced to allow palliative care charities to claim a refund of VAT incurred on expenses that are linked to non-business activities. A similar change will also be introduced to allow medical courier charities to recover the VAT they incur on non-business activities.

Whilst these measures are welcome and will benefit a number of organisations we feel that they could have been extended to a greater number of public sector and not-for-profit bodies that provide vital services in the UK. For example, palliative care charities that raise charges for their services will still incur irrecoverable VAT. At a time where grant funding is decreasing and donations are more difficult to secure, charities are often required to enter into Service Level Agreements and to raise charges for their care and welfare services. This increases the amount of business activities an organisation has, which could preclude them for recovering VAT under the new arrangements.

The Budget changes show that the government can introduce measures to reduce the irrecoverable cost of VAT where it believes this is appropriate. We will be looking into the changes, commenting on them and evaluating the full extent of the suggested benefits as soon as more information is published. We would hope that as time goes by and the importance of the ‘third sector’ in the community is fully recognised, the government will extend its VAT recovery policy to more public sector and not-for-profit organisations.

For more information please contact the Public Sector team.