VAT & Contracted Out Services
The Upper Tribunal has handed down an important VAT decision for NHS Trusts and local authorities.
The case involved Midlands Partnership University NHS Foundation Trust, and centred on whether the Trust could claim a VAT refund under the Contracted Out Services (COS) regime for health services it provided to local authorities. This included health visiting, sexual health, and infection control. The Trust argued these were “non-business” activities, so they should get a VAT refund under the special 'COS regime'. HMRC disagreed, saying these were taxable supplies, not eligible for COS relief.
The Tribunal looked at three key questions:
● Were the services supplied “for consideration”? In other words, was there a direct link between what the Trust did and what it was paid? The answer: yes. The contracts required the Trust to deliver specific services, and the local authorities paid for them. This wasn’t just public funding or a grant - it was payment for a service.
● Was the Trust carrying out “economic activity”? Again, yes. Even though the Trust isn’t profit-driven, it was providing services for payment under long-term contracts. The fact that the services were loss-making or provided free to the public didn’t matter.
● Was the Trust acting under a “special legal regime” as a public authority? The Tribunal said no. The rules and standards applied equally to public and private providers, so there was no special regime that would take the Trust out of the VAT net.
The upshot? The Trust wasn’t entitled to a COS VAT refund. This decision clarifies that when NHS trusts provide services to local authorities under contract, they’re generally making taxable supplies for VAT purposes - not “non-business” activities.
Why does this matter? It has big financial implications for NHS bodies and local authorities across the UK. If you’re involved in commissioning or providing public health services, it’s time to review your VAT position and contracts.
The message is clear: VAT rules apply even in the public sector, and the details of your contracts really matter. We have significant experience in this area considering central and local government funding and contracts. Please contact us to discuss if you think this could affect you or your clients.
