Health and social care integration: finance guidance

5 VAT

5.1 Revenue

5.1.0.1 Scottish Government has concluded discussions HMRC on a method to determine the correct levels of VAT recovery for the delegating partner and host partner. The method of apportionment to calculate the VAT is based on existing 2002 HMRC/DoH guidance and that used by the Highland partnership that specifically deals with "lead agency" arrangements. This is based on the fact that the ultimate legal responsibility for delivery of the services still resides with the delegating partner and that, for VAT purposes, it remains the principal in respect of the supply, with the host partner acting as an agent in delivering the services.

5.1.0.2 In this method, the host partner invoices the delegating partner for their element of the VAT which would have been recovered by the delegating partner, if the functions had not been delegated. Worked examples and a sample invoice are included at the end of this section.

5.1.0.3 HMRC have been clear that the alternative model in the 2002 HMRC/DoH guidance, in which the host partner acts as principal, is not applicable to the lead agency integration arrangements under the Act.

5.1.0.4 The 2002 guidance allows for any reasonable method to be used to determine the proportions of VAT recoverable by the different partners.

5.1.1 Proposed apportionment method

Health Board host partner

5.1.1.1 It is proposed that all input VAT incurred by the Health Board, including that which relates either directly or indirectly to the delegated services, is processed under the Contracted Out Services (COS) rules normally operated by NHS. The VAT is recovered under section 41(2), VAT Act 1994. It is acknowledged that this VAT regime will not allow full VAT recovery on associated costs, for example VAT incurred on goods/consumables will not be recoverable and the VAT on certain services that do not fall within the COS headings.

5.1.1.2 In order to avoid the VAT leakage on other costs which would previously have been recovered by the Local Authority under the section 33 rules, a monthly memorandum VAT invoice would be raised by the NHS to the Local Authority setting out the additional VAT to be recovered. This will include goods/consumables and services.

5.1.1.3 In order to establish the amount of VAT to be charged, the partners will analyse the Local Authority's expenditure for the year prior to integration and split the input VAT incurred by the Local Authority on the delegated adult services between:

• Value of VATable expenditure which would have been recoverable had the COS rules been applied; and
• Value of expenditure on which VAT was incurred which would not have been recoverable under COS.

5.1.1.4 The value of none COS expenditure at (b) is then expressed as a percentage of the total outturn for the delegated adult services for the year. An example summary of the analysis of the 2012 expenditure which can be undertaken has been provided below:

	Value of Expenditure	Percentage
	£	£
Local Authority social care budget transferred to NHS	[65,000,000]
Expenditure which qualifies as eligible services for COS	2,486,465
Non-COS expenditure on which VAT is incurred	3,299,545	5.07%

5.1.1.5 The annual value of VAT to be invoiced to, and recovered by, the LA would be calculated by:

• Applying 5.07% to the annual budget transferred to the Health Board; and
• Applying the current VAT rate to this calculated value.

5.1.1.6 The recoverable VAT would be notified to the Local Authority on a monthly basis for inclusion in the Local Authority's VAT return. This approach would:

• Be administratively easy for NHS to operate as staff processing input VAT would continue to operate the existing rules and procedures;
• Reflect the increased input VAT which would result from increased budgets;
• Reflect any future changes in the VAT rate;
• Ensure that there is no double counting of VAT which would have qualified for recovery under COS; and
• Be easy to verify by HMRC officers reviewing the arrangements.

Local Authority host partner

5.1.1.7 If the Local Authority is the host partner, the Local Authority may act as agent for the delegated services and the apportionment method noted above used to recover VAT under s33 VAT Act 1994.

5.1.1.8 This is likely to result in the Local Authority recovering more VAT through its normal Accounts Payable process. The law only permits VAT recovery in accordance with the rules applicable to the delegating partner (ie the Health Board in this case) and in the circumstances HMRC have agreed that the most appropriate method of correcting over recovery by the Local Authority is for the Local Authority to issue a memorandum credit note which will reduce the input VAT recovered. Worked examples and a sample credit note are included at the end of this section.

5.1.2 Implementation

5.1.2.1 Each partnership will have to go through the exercise to establish the recovery percentage which applies to their arrangements. The calculation will need to be revised periodically and the Scottish Government is negotiating with HMRC on the likely/reasonable review period.

5.1.2.2 If the standard approach agreed with HMRC and outlined above is not used then individual partners will be required to use actual expenditure and perform the calculation on an annual basis; partners will not be permitted to switch back and forth between the standard approach and actual basis.

5.2 Capital

5.2.1 There is a fundamental difference in the VAT recovery position of Health Boards and Local Authorities in respect of property expenditure. Health Boards are not allowed VAT recovery on the purchase of goods or property assets. Local Authorities will typically be allowed full VAT recovery on all capital and revenue expenditure on both new construction and repairs/extension/maintenance of property. Health Boards are not allowed VAT recovery on new construction and limited recovery in other scenarios. New build using an NPD model via Scottish Futures Trust or the HUB initiative will typically lead to VAT recovery under Section 41, VAT Act 1994 as the supply is of services rather than goods. HMRC are currently considering the VAT position of the HUB initiative and this guidance will be updated accordingly.

5.2.2 In the submission to HMRC regarding VAT recovery on delegated budgets it has been considered that on-going revenue expenditure in respect of property assets used to deliver delegated services should be calculated on the same basis as all revenue expenditure i.e. if the VAT recovery is not allowed under Section 41 rules but would have been permitted under Section 33 rules then the VAT will be identified on the memorandum invoice to allow VAT recovery under Section 33. This is on the basis that there is no supply of the property asset by the Local Authority to the Health Board, rather a license to operate from facilities and deliver the delegated services.

5.2.3 The VAT implications for each of the of the options for use of capital assets by the host partner in providing the delegated services, set out in section 6, need to be considered by partners.

5.3 VAT Worked Examples

Worked Example (1)

Local Authority acting as Lead Agency.

HM Health Board delegates £ 220,565,924 to ABC Council.

Step 1

LA will automatically recover all VAT (s33).

Identify the amount of net expenditure related to the delegated services.

Analysis of Expenditure by HMHB Subject to VAT	£
Care Expenditure	361,763
Equipment	3,505,824
Goods, consumable etc	670,898
Professional Fees	3,848,626
Other Services	126,777
Property Costs	158,829
Repair and Maintenance	39,680
Staff Costs	5,697,615
Transport/ Travel Costs	434,613
Utilities	1,511,798
Total	16,356,423

Step 2

Analyse the total expenditure in step 1.

Value of expenditure	£
Total Expenditure by HMHB	220,565,924
Expenditure which qualifies as eligible services for COS	6,546,948
Non-Cos expenditure on which VAT is incurred	9,809,475

Step 3

Calculate non COS expenditure on which VAT is incurred as a percentage of the total budget which has been delegated between the partners in respect of the services to be provided.

i.e.

Non-Cos expenditure on which VAT is incurred
Total delegated Health Budget
	£
Calculation :	9,809,475	=	4.45%
	220,565,924

Step 4 (on a monthly basis)

Using the calculated percentage of 4.45%, determine the amount to be included in the monthly memorandum credit. To do this, calculate:

4.45% * £220,565, 924/12 (budget transferred on a monthly basis) = £ 817, 931

VAT should then be charged at the standard rate, multiply the amount by 20%

£817, 931 * 20% = £163,586

Step 5

Finally a VAT credit note should be raised stating this amount (£163,586) by Local Authority to the NHS board.

The LA should adjust its VAT recovery or not deduct this VAT on its VAT return.

The effect of this procedure should ensure that both parties are put in the same position from a VAT perspective as they would have been if they had provided the services directly, thereby regularising the VAT position.

Worked Example ( 2 )

NHS Board acting as Lead Agent

ABC Council delegates £65,000,000 to HMHB.

Step 1

Identify the amount of net expenditure related to the delegated services.

Analysis of Expenditure Subject to VAT	£
Expenditure recoverable under COS	2,486,465
Expenditure irrecoverable under COS	3,299,545
Total	5,786,010

Step 2

Analyse the total expenditure in step 1.

Value of expenditure	£
Local Authority social care budget transferred to NHS	65,000,000
Expenditure which qualifies as eligible services for COS	2,486,465
Non-COS expenditure on which VAT is incurred	3,299,545

Step 3

Calculate as a percentage of the total budget which has been delegated between the partners in respect of the services to be provided.

i.e.

Non-COS expenditure on which VAT is incurred
Total Health and Social Care budget delegated
Calculation:	3,299,545	=	5.07%
	65,000,000

Step 4 ( on a monthly basis)

Using the calculated percentage of 5.07%, you can determine the amount to be included in the monthly memorandum invoice.

To do this, you would calculate:

5.07% * £65,000,000/12 (budget transferred on a monthly basis)= 274,625

VAT should then be charged at the standard rate. Multiply the amount by 20%.

£274,625 * 20% = £54,925

Step 5

Finally a monthly memorandum should be issued stating this amount (£54,925) by the NHS Board to the Local Authority in order to account for the local Authority to recover this VAT.

The NHS Board does not have to account for this VAT to HMRC.

The effect of this procedure should ensure that both parties are put in the same position from a VAT perspective as they would have been if they had provided the services directly, thereby regularising the VAT position.