Free car parking – the impact on VAT recovery and income

Liaison Financial

The Covid pandemic led to many English NHS trusts allowing free parking for staff and visitors. The Government provided funding to NHS trusts to cover the loss of revenue resulting from not charging staff for car parking. This funding finished in August 2020, although the Government’s expectation is that NHS trusts will continue to make free parking available to staff for the duration of the pandemic.

As well as not charging staff, some NHS trusts opted not to charge all visitors for car parking in 2020. Some trusts have continued with this policy, whilst others re-introduced charges to visitors in the latter end of 2020. Immediately before the pandemic, the Government announced its expectation that all trusts would allow free parking permanently for certain visitor categories, examples being disabled and visitors for extended stay patients. Free parking for these patient and visitor categories was due to be mandatory from January 2021.

Charging for car parking creates a taxable supply (a business activity) which results the underlying right to reclaim input VAT directly incurred in the course of making that supply. The VAT could for example, be on revenue expenditure incurred on maintaining a car park, or capital costs building a new car park or remodelling an existing facility. Taxable income from car parking can also be a significant component in boosting VAT recovery on residual expenditure incurred on all a trust’s activities. A reduction on taxable income will result in higher level of VAT payback when your annual partial exemption calculation is undertaken for the 2020/21 financial year.

Where free use of a car park is permitted and there is zero or reduced taxable income, the question of whether direct input VAT remains fully recoverable and the impact on your annual partial exemption calculation, needs to be addressed.

In the light of these issues, HMRC via the HfMA, have invited NHS organisations to complete a short survey so that HMRC can assess the NHS wide impact of the loss in revenue and on VAT recovery.  We encourage all NHS organisations that have implemented free car parking to staff and visitors to complete the survey.

Pending any further information from HMRC following their analysis of the survey results, Liaison’s opinion on the potential impact on VAT is as follows:

Revenue expenditure

If the VAT was incurred and recovered at the point in time that a charge was being made for the parking, then the VAT would be recoverable as a business activity.

If the cost was incurred when a trust was no longer charging for car parking and that was a permanent change, then the normal COS rules would apply and there would only be scope for VAT recovery on qualifying services.

If free car parking is a temporary measure, and there is an intention to make taxable supplies again in the future, then provided it can be demonstrated that the expenditure is a cost component of future supplies, the input VAT should be treated as residual for the purposes of the partial exemption calculation for 2020/21. There is no time limit on when future taxable supplies must be made.

Capital Expenditure

Expenditure on capital projects exceeding £250,000 falls within the scope of the Capital Goods Scheme (CGS). This mechanism requires that annual adjustments are made to the amount of input VAT originally incurred on a project. These adjustments are spread over the deemed 10-year life of a CGS building. For example, if all of the  VAT was claimed in year-1 on the basis that all car parking would be charged for, but full or partial free parking was allowed from a later year, this would result in a partial payback of input VAT to HMRC under the CGS mechanism.

Residual (overhead) expenditure

The reduction in taxable income resulting from free car parking will have an impact on the level of VAT recovery on residual costs.  In the forthcoming months, Liaison’s VAT advisors will be undertaking reviews of the 2020/21 partial exemption annual adjustments.  These reviews will take account of any changes in car parking arrangements in the year. Our advisors will also be reviewing CGS calculations where they apply to car parking projects.

Summary

As the availability of free parking spans into a second year and becomes less of a temporary measure, the impact on VAT recovery is likely to be felt more keenly.  Because of the variety of car parking arrangements across NHS trusts, the effect on input VAT recovery will vary. For this reason, we recommend that any individual concerns you may have are taken-up with your Liaison VAT advisor. Liaison will continue to evaluate its opinion on the impact of free parking in the light of any further information coming from HMRC.