Budget 2021: Key updates for the NHS

Liaison Financial

The Chancellor of the Exchequer, Rishi Sunak, presented his Budget to Parliament on Wednesday 3 March 2021. Whilst the budget did not include any detailed plans for the NHS, the red book published alongside Sunak’s statement showed the NHS England budget will fall by £9bn £139bn in 2021-22.

Here, we look at two further measures announced which may affect NHS organisations:

Catering and accommodation – reduced-rate VAT extended

Among the announcements came an extension to the 5% VAT rate for qualifying supplies of catering and accommodation. The reduced rate was due to end on 31 March 2021 but will now apply until 30 September. Thereafter, the VAT rate of 12.5% will apply to 31 March 2022 and after that supplies will revert to the 20% standard-rate. Further details on the scope of the reduced rates can be found here.

Leased cars and salary sacrifice

The Chancellor also confirmed that the so-called de-supply order will be repealed. This order currently permits the NHS to reclaim all the VAT incurred on leasing vehicles that are made available to employees. The withdrawal of the order will not take effect until the Finance Bill receives Royal Accent, which is expected to be later this year.

The repeal follows the result of the decision in the Court of Appeal concerning Northumbria Healthcare NHS Foundation Trust, where HMRC invited claims for underclaimed VAT arising from its previous incorrect advice.  

Concerned that the decision in the Court of Appeal gave the NHS an entitlement to reclaim VAT that was not intended by legislation, HMRC has announced their intention to withdraw the legislation that led to the decision. As per the Chancellor’s announcement, the de-supply order will be repealed at some point in 2021 and no later than autumn 2021.

What is impact of this announcement?

Firstly, the repeal will not have retrospective effect. Any claims for VAT refunds will still be valid provided they are sent to HMRC before the order is repealed and before the deadline set in HMRC’s 29 October 2020 letter. Further, until the repeal, the NHS can continue to reclaim the COS VAT incurred on lease cars provided to employees under salary sacrifice arrangements.

We expect HMRC to issue guidance on the precise impact of the repeal of the de-supply order for the NHS. This will have a financial impact on the NHS and will need to be considered in terms of VAT recovery and possible output tax liabilities.

The proposed change will inevitably have a consequence for the overall cost benefits of lease car schemes. Whether the repeal of the de-supply order will include a transitional measure to take account of existing contracts remains to be seen. We recommend that you discuss the potential cost consequences with your lease car supplier. 

Should you require any further information on the measures announced in the Budget, or how they affect VAT recovery for your trust, please contact your Liaison VAT advisor or contact us.