In our mailshot issued in November 2019 we advised you that HMRC had completed their review of COS heading 14. HMRC advised that they had ‘reaffirmed the principles of the current guidance’ but they declined to provide any further clarification. We have since received a reply from HMRC to our complaint regarding the lack of clarity and inconsistent application of the guidance by HMRC. Regrettably their response has not taken us much further forward, but we are actively pursuing more definitive details from HMRC.
Pending any further clarification from HMRC, we can advise you of our latest interpretation of HMRC’s stated position and recommend how past and future VAT recovery under heading 14 should be addressed. The comments below should be read in conjunction with HMRC’s on-line guidance.
Heading 14 refers to ‘computer services supplied to the specification of the recipient’. HMRC are clear that in order to reclaim VAT, this primary condition must me met. References to a fully-managed system are no longer present in HMRC’s guidance and they are firm in their position that the fully-managed test is not relevant to VAT recovery.
In respect of both computer systems and software, the supply must be unique to the recipient NHS organisation or to the NHS as a whole.
If you can demonstrate that the system or software has been designed to the detailed specification of the recipient, you should be confident that the VAT is recoverable. It becomes more difficult where the system or software is not bespoke to the recipient. In these cases, HMRC will accept VAT recovery if the product was designed to the specification of another NHS body or to the speciation of the NHS as a whole. HMRC has referred to the NHS being involved in creating the specification or in influencing the product’s development.
HMRC’s online guidance says that if a system can be used by private healthcare providers, it would not meet the designed to the specification test and VAT recovery will not be possible. However, in their written response to Liaison, HMRC advise that non-NHS use does not preclude a product from VAT recovery. As yet HMRC has failed to explain this contradiction but we are seeking further clarification. We consider the stance taken in their letter to be far more reasonable and this is the approach Liaison will adopt until HMRC state otherwise.
In evaluating whether a system is bespoke to you, all the component parts of that system should be taken into consideration. For example, it could be the case that one or more components are not bespoke to the recipient NHS body, but when all the component elements are viewed together, they may amount to a system that is unique and therefore the VAT incurred may be recoverable.
You will see from the above summary that it may be necessary to establish the origins of a system or software in order to verify whether a product was designed to the specification of another NHS body or of the wider NHS sector. This will require discussions with the supplier and delving into the history of the product to establish how the product was created and the degree of influence on the design by one or more NHS bodies.
In the next few months Liaison VAT advisors will be completing their reviews of VAT recovery for 2019/20. This will include reviewing recovery under heading 14. To assist in this process we are asking our clients to provide a list of their systems and software. This is likely to require engagement with the IT department and discussions around the various systems and software. This may require your IT department to start a dialogue with suppliers regarding the origins of their products. Your Liaison advisor will be in touch to discuss these next steps so that VAT recovery on IT expenditure is finalised in advance of the July deadline.
We will continue to fine-tune our advice to you as and when more details are disclosed by HMRC. In the meantime, if you have any queries concerning VAT recovery under heading 14, please discuss with your Liaison VAT advisor.