Guidance Notes for Government Departments. Seventh edition Issued: 19 July 2012

Transcription

1 Guidance Notes for Government Departments Seventh edition Issued: 19 July 2012

2 Guidance Notes for Government Departments Seventh edition 2012 These guidance notes cancel and replace the 6th Edition last reissued and updated in March They are designed to give a brief introduction to VAT and the way in which it applies to Government Departments (GDs). They have been generally revised and updated and are primarily designed for VAT Liaison Officers (VLOs) in GDs. Guidance Notes for Government Departments Page 2 of 87

3 Contents i ii iii iv v Introduction How to use this guidance Who should read this guidance? Useful Notices Use of tax advisors Do you have any comments? PART 1 - An overview of VAT VAT Liaison Officers 1.1 What are VAT Liaison Officers? 1.2 How do I keep up with changes in VAT? 1.3 How to tell us of changes. 1.4 Who should I contact if I have a query? 1.5 I have a query, what sort of information do I need to provide? 1.6 How quickly will you deal with my query? A basic Introduction to VAT 1.7 What is VAT? 1.8 How does VAT affect GDs? 1.9 Is there a difference between VAT incurred in carrying out statutory functions and VAT incurred in respect of other supplies made by a department? 1.10 How does VAT work? 1.11 What are taxable supplies? 1.12 What is the difference between Business and Non-Business activities? 1.13 How does Business apply to GDs? 1.14 I have heard that some supplies are Exempt from VAT. What does this mean? 1.15 I have heard the phrase Outside the scope of VAT. What does this mean? 1.16 When must VAT be accounted for and how? 1.17 What VAT can a GD recover? 1.18 What about VAT GDs and trading funds incur on making both taxable and exempt supplies? The Reverse Charge 1.19 What is the Reverse Charge? 1.20 How does the Reverse Charge Work? 1.21 What is the effect of the reverse charge? Guidance Notes for Government Departments Page 3 of 87

4 Registration for VAT 1.22 When does a GD need to register for VAT? 1.23 Why aren t GDs subject to the normal VAT registration rules? 1.24 How will HMRC register my department for VAT? The VAT Return 1.25 How do I complete my VAT return? 1.26 Am I allowed to Net Off? 1.27 When should I recover and account for VAT? 1.28 How often should my VAT return be submitted? 1.29 How do I correct errors on VAT returns? 1.30 Overview of the penalties system PART 2 - Sales and the Treasury Taxing Direction PART 2 A - General Advice about Sales 2.1 What happens when my department sells goods and services to other GDs and Executive Agencies? 2.2 What happens when my department sells goods and services to Non-Departmental Public Bodies (NDPBs)? 2.3 What happens when an Executive Agency sells goods or services to another GD? 2.4 What happens if a customer does not pay? Supplies of Goods outside the UK 2.5 Which countries are included in the VAT territory of the EC? 2.6 What happens when I sell goods to customers based in another European Community (EC) country? 2.7 What other documentation must I complete? 2.8 What are EC sales lists? 2.9 How often do I have to submit ESLs? 2.10 Where can I find out more information about completing my EC Sales List? 2.11 What happens if my EC customer is not registered for VAT? 2.12 What is Intrastat? 2.13 How do I account for VAT on goods exported outside the EC? Supplies of Services 2.14 Services supplied within and outside the European Community? 2.15 What is place of supply? 2.16 What services are being supplied? Guidance Notes for Government Departments Page 4 of 87

5 PART 2 B - The Treasury (Taxing) Direction 2.17 Recent Changes 2.18 What is the Treasury (Taxing) Direction and its purpose? 2.19 Where can I find the Direction? 2.20 How should output tax on such supplies be accounted for to HMRC? 2.21 What activities are contained in the Direction and how should they be defined? PART 3 - Purchases and The Treasury Contracting Out Directions PART 3A - General Information about Purchases 3.1 Do any special rules apply when GDs purchase goods and services? 3.2 How do I query whether a supply is correctly liable to VAT? 3.3 What happens if I purchase goods from countries outside the EC? 3.4 What happens if I purchase goods from countries in the EC? 3.5 What happens if I buy services from countries outside the EC? 3.6 What happens if I buy services from inside the EC? PART 3B The Treasury (Contracting Out) Direction 3.7 What is the purpose of the Contracting Out Direction? 3.8 What is refunded? 3.9 Where is the Direction published? 3.10 Can additional services be added to the Direction? 3.11 Who can claim refunds under the Direction? 3.12 How are such refunds made? 3.13 What activities are contained in the Contracting Out Direction? 3.14 Services agreed by HMT for inclusion in the next revision of the direction PART 4 - Government Departments in Northern Ireland 4.1 Business activities of Government Departments in Northern Ireland 4.2 Non Business activities of Government Departments in Northern Ireland What is section 99 of the VAT Act? Which Departments are eligible for refunds under section 99? What can be recovered under section 99? What is excluded from section 99? 4.3 GDNIs and purchases of cross border services. What happens if I buy services from suppliers which are treated as being supplied in the Republic Of Ireland? Guidance Notes for Government Departments Page 5 of 87

6 PART 5 Government Departments, Executive Agencies, Trading Funds and Non Departmental Public Bodies (NDPBs) 5.1 What is the definition of a GD? 5.2 What are Executive Agencies? 5.3 What is the VAT position of supplies between a separately registered Executive Agency or Trading Fund and its parent GD? 5.4 Trading Funds 5.5 What happens when GDs become Executive Agencies or Trading Funds? 5.6 Executive Non Departmental Public Bodies (NDPBs) 5.7 What happens if a GD makes taxable supplies to an NDPB?. PART 6 - Reference Section. Funding Advice Sheet 1 Supplies of Staff Sheet 2 Section 278 Agreements Advice Sheet 3 Land and Property Advice Sheet 4 Money Laundering Regulations Advice Sheet 5 VAT and flexible benefits for employees (Salary Sacrifice) Advice Sheet 6 Guidance feedback form Guidance Notes for Government Departments Page 6 of 87

7 i Introduction These guidance notes are designed to give you, the VAT Liaison Officers (VLO) in your department a brief introduction to VAT and the way it applies to government departments. The VAT Supply team of VAT Policy Division has produced these notes as we have policy responsibility for the VAT affairs of GDs. The Government Departments Team located within HMRC s Public Bodies Group (PBG) is responsible for compliance activity (which includes audits and advice) to the Government sector, which includes GDs, Trading Funds, Executive Agencies, Non Departmental Public Bodies (NDPBs) and associated entities. The guidance notes are divided into six parts: Part 1 gives a basic background about the VAT system and how it applies to GDs. Part 2 gives an explanation of how GDs sales should be treated for VAT purposes and how The Treasury (Taxing) Direction applies to them. Part 3 deals with GDs queries about purchases and the Treasury (Contracting Out) Direction. Part 4 provides information for GDs in Northern Ireland Part 5 provides information for Executive Agencies and Trading Funds. Part 6 provides additional detailed reference material on specific activities that GDs may engage in. The topics covered by the information sheets may not apply to all GDs The Annex - gives details of place of supply rules prior to 1 January [N.B. Any reference to Departments or GDs in this guidance note should be taken to include all Crown Bodies covered by Section 41 of the VAT Act 1994, unless stated otherwise] Guidance Notes for Government Departments Page 7 of 87

8 ii Who should read this guidance? If you are A Government Department in England, Scotland or Wales A Government department in Northern Ireland An Executive Agency or a department responsible for Executive Agencies. A Non-Departmental Public Body (NDPB) or the parent department of an NDPB. Please read Parts 1,2, 3, 5 and 6 Parts 1,2a, 2b, 3a, 4, 5 and 6 Parts 1, 2, 3, 5 and 6 NDPBs are NOT Government Departments for VAT purposes. However they are associated to a parent department. You should contact your Finance Team in your parent department for further advice on VAT issues. iii Useful Notices We suggest you read these guidance notes in conjunction with Notice 700 The VAT Guide. You may also find it useful to consult the following VAT notices that are referred to in this guidance. Copies of the notices can be accessed via the HM Revenue & Customs website at Notice 700/12 Notice 700/18 Notice 701/30 Notice 703 Filling in your VAT return Relief from VAT on Bad Debts Education & Vocational Training What happens if I buy services from suppliers which are treated as being supplied in the Republic Of Ireland? Notice 723A Refunds of VAT in the European Community for EC and Non-EC businesses Notice 725 The Single Market Notice 741 Place of Supply of Services (before 1 January 2010) Notice 741A Place of Supply of Services from 1 January 2010 Notice 742A Opting to tax land and buildings If you are very new to VAT, you may find it useful to read through Notice 700/15, The Ins and Outs of VAT. The notice is primarily designed for new VAT registered businesses, will give you a useful overview of how VAT works. Guidance Notes for Government Departments Page 8 of 87

9 You can find information about how to obtain copies of Notices in Section 1.4 of this guidance, Who should I contact if I have a query? iv Use of tax advisors The Treasury s view of the use of Tax Advisors and Tax Avoidance is explained in the Managing Public Money part of the HMT website; The view is expressed in section of the HMT guidance. v Do you have any comments? We would be pleased to receive any comments or suggestions you may have about this guide. Please use the feedback form included at the end of the guidance. This feedback will help us to ensure that future editions of this guidance are user friendly and informative. Guidance Notes for Government Departments Page 9 of 87

10 PART 1 - Overview of VAT VAT Liaison Officers 1.1 Who are VAT Liaison Officers (VLOs)? All GDs, separately VAT registered Executive Agencies or Trading Funds, must appoint a VLO. As a VLO you fulfil an important and valuable role as you act not only as the expert for your Department s VAT affairs in general, but you will also be able to advise your colleagues on how to comply with the VAT requirements by ensuring that: (a) (b) (c) (d) your department reclaims or pays the correct amount of VAT; the list of business activities in the annual Taxing Direction (see Part 2B of these notes) is kept up to date and telling HMRC as soon as a change occurs; HMRC is made aware at an early stage of any Government initiatives that GDs are planning or about to announce. In many cases, this is because there are likely to be VAT implications that could impact on funding. Therefore it is important that you alert us to these issues so that they can be resolved at an early stage; and you act as contact point within your department and your Finance Team for VAT enquiries. We believe it is important that enquiries to HMRC on VAT matters should come from you, or should have been discussed with you prior to contacting the Government Departments Team, as you will have accumulated a considerable amount of knowledge about how VAT affects your Department and the accounting systems that are involved. This saves duplication of effort, minimises any misunderstandings and should ensure a speedier service from us. 1.2 How do I keep up with changes in VAT? There are a number of methods of keeping up-to-date with developments in VAT which are available from the HM Revenue & Customs website. The address is (a) VAT Notes - These are available electronically as they are issued on quarterly basis. They are particularly important as they flag up VAT changes as and when they occur. Guidance Notes for Government Departments Page 10 of 87

11 . (b) (c) (d) Revenue and Customs Briefs - These give information on recent significant VAT changes and can be accessed by clicking on or the VAT reference material and updates section at VAT Notices - The full range is available via our website. VAT Guidance - This is available via our website and provides detailed information on specific areas of VAT legislation. 1.3 How to tell HMRC of changes You will have a contact name, Customer Relationship Manager (CRM) or Customer Co-ordinator within the Government Departments Team. You should inform them of any changes in circumstances that could have an impact on your department s VAT affairs. This is because this allows us to ensure that our records are kept up to date. For example, please let them know if your department Changes its status - please refer to Part 5 of the guidance for further details; Changes its name and/or address; or Appoints a new VLO - please write to the nominated contact point shown in Who should I contact if I have a query? If you require Verification of your customers VAT numbers General advice about Import & Export procedures Advice about Treasury Directions Certificates of status of Taxable Person.(VAT 66s) Advice on completing your VAT return and VAT 21. Advice on correcting errors on your VAT return and VAT 21. Advice on GDs Option To Tax issues. Information about pre and post Customs clearances Assistance with VAT queries relating to Non Departmental Public Bodies (NDPBs) which your department sponsors Please contact Your nominated CRM or Customer Co-ordinator within the Government Departments Team Guidance Notes for Government Departments Page 11 of 87

12 Information about the VAT liability of supplies made to your department. Changes to your department s return periods Changes to your bank details Changes to name or address details on your VAT return Your supplier Debt Management & Banking, GABS Team HM Revenue & Customs 7 th Floor Alexander House 21 Victoria Avenue Southend On Sea SS99 1AA (Copied to your CRM or Customer Co-ordinator) Help or advice with on-line filing only The address in the box above or alternatively phone I have a query, what sort of information do I need to provide? You will need to provide the following information Your department s name and your contact details. A summary of all the facts about the transaction concerned, together with copies of any documents relating to the particular transaction. For example What is being supplied and why Who is making the supply Where you think the supply is taking place When you think the supply is taking place Copies of relevant documentation including copies of contracts /agreements / Memorandums of Understanding etc Your opinion of the issues referring to HMRC information Areas of contention when you require clarification from HMRC. Details of the VAT in question. What you need a decision about For example: Whether an activity is a supply for VAT purposes; The VAT liability of a supply: whether your department is eligible to claim a refund of VAT under one of the Contracted out Service Direction headings Guidance Notes for Government Departments Page 12 of 87

13 Please say if the matter is urgent If you need to receive an answer by a specific date, please say. This helps to prioritise replies. However please bear in mind that if the matter is complex HMRC may not be able to give a quick answer, therefore it would be useful if you could factor this in and make sure you contact the Government Department Team as soon as possible Please refer to paragraph 1.6 for details of response times How you will use the decision If you want to pass the reply on to other GDs or businesses, as it will be necessary to say if the advice has wider applications. We may also ask you to liaise with the other GDs or businesses to ensure that they can confirm you are in possession of the full facts and are acting on their behalf. Any previous correspondence on the matter including the reference number This means that we can find and retrieve information To help minimise delays in responding to your queries please try to avoid: Only contacting HMRC at the last minute. Forwarding long strings because these can make it difficult for us to work out your problem, as the authors of some of the text in a long chain may not have intended it to be read by someone outside your department. As a result, the authors may have assumed that the person reading their will be familiar with the topic or policy to which they are referring, but this won t be obvious to us. Using abbreviations, internal jargon or acronyms without explaining them. 1.6 How quickly will you deal with my query? The Government Departments Team will aim to respond to written enquiries within 30 working days of receipt. However where this is not possible we will advise you when a reply is likely to be issued. Please note, that we treat messages as written enquiries. Guidance Notes for Government Departments Page 13 of 87

14 A Basic Introduction to VAT 1.7 What is VAT? VAT was introduced in the United Kingdom (UK) in It is a tax charged on most supplies of goods and services made in the course of business in the UK by VAT registered businesses. 1.8 How does VAT affect GDs? VAT affects GDs because it will have an impact on the programmes they deliver. This is because government tends to deliver public services under statutory powers to the public. This means that the majority of activities undertaken by GDs are not usually supplies that are subject to VAT. Therefore, as with the majority of VAT registered businesses, they cannot generally recover the VAT they may incur which relates to these statutory activities, except in limited circumstances discussed later in this guidance see Part 3. However, GDs can, and do, make supplies that are subject to VAT. This may be because the function is not carried out under any particular statutory requirement, or the activity may be deemed to be a business activity by the Treasury s Taxing Direction see Part 2B. Therefore, GDs must ensure that they have carefully considered the VAT implications in the funding arrangements of any programmes they deliver, or plan to announce. 1.9 Is there a difference between VAT incurred in carrying out statutory functions and VAT incurred in respect of other supplies made by a department? Yes there is. You must be able to differentiate, in your records, the VAT you have incurred in respect of non-business statutory activities, and the VAT you incur in respect of other supplies the department makes, (i.e. goods sold or services provided for a charge). This distinction is very important because it directly affects the overall amount of VAT the department can recover. (see 1.13 below) 1.10 How does VAT work? If you make Taxable Supplies, in the course of Business you have to account to HMRC for the VAT due. This is called Output Tax and is charged to your customers. Guidance Notes for Government Departments Page 14 of 87

15 With a few exceptions, VAT can be recovered on the purchase, importation from outside the EC, or acquisition within the EC, of taxable goods and services if these are to be directly used in connection with the making of taxable supplies by your department. This is called Input Tax. The exceptions are VAT incurred on business entertainment, and in some cases, the VAT incurred on cars What are Taxable Supplies? All goods or services, which are subject to VAT, are called Taxable Supplies and currently there are three rates of VAT VAT Rate The Standard Rate (currently 20%) The Reduced Rate (currently 5%) The Zero Rate ( 0%) Examples of supplies Most supplies of goods and services are subject to this rate of VAT; Supplies of: - fuel and power to domestic users and charities that satisfy certain tests, and installing energy saving materials. Most Food other than that supplied in the course of catering, Newspapers & books, Young children s clothing Certain supplies to and by charities. Although no VAT is charged such supplies are still taxable but the rate of VAT charged is 0% 1.12 What is the difference between Business and Non-Business activities? It is very important that you understand the difference between Business and Non-Business activities: By Non-Business we mean: Activities carried on for no consideration and which are excluded as supplies within the VAT legislation. Activities carried out by GDs under public statute which do not apply to non-public bodies By Business we mean: Activities falling within the Treasury s Taxing Direction (see Part2B) Activities which do give rise to supplies of goods and services and are not carried out under public statute Guidance Notes for Government Departments Page 15 of 87

16 1.13 How does Business apply to GDs? In the majority of cases, the activities carried out by GDs are statutory in nature and are treated as non-business for VAT purposes. Other activities which would ordinarily result in supplies of goods and services for VAT purposes are regarded as outside the scope of VAT when a GD does them under public law, unless this would significantly distort competition. The Treasury (Taxing) Direction addresses the issue of competition. If a GD supplies goods or services which are listed in the direction, these are always within the scope of VAT and taxed at the appropriate rate. This direction is updated periodically. Further details may be found in Part 2B of this guidance I have heard that some supplies are Exempt from VAT. What does this mean? Some supplies are Exempt from VAT. These include, financial services, such as banking transactions; many transactions in land and buildings; and certain types of training and education. Exempt supplies must not be confused with zero-rated supplies. In the case of exempt supplies whilst no VAT is charged on the supply of such goods or services, there is no entitlement to recover Input Tax. Whilst a VAT registered business does not have to charge tax on a zero-rated supply it may nevertheless, subject to the normal VAT rules, recover Input Tax on VAT that it incurs in making those supplies 1.15 I have heard the phrase Outside the Scope of VAT, what does this mean? Certain supplies fall Outside the Scope of VAT. In summary, this means that they do not fall within UK VAT legislation. Typical outside the scope supplies are activities that are either funded by grants or donations or activities GDs undertake in carrying out their statutory functions. (Please note that whilst these may be outside the scope for VAT purposes, they could be treated differently for other tax purposes.) Other outside the scope supplies will be where the place of supply is outside the UK. Guidance Notes for Government Departments Page 16 of 87

17 1.16 When must VAT be accounted for and how? VAT becomes due when a supply is treated as having taken place; this is called the tax point. It is worth spending time to familiarise yourself with the rules on tax points, which can be found in Notice 700. Although VAT becomes due when the supply takes place, it only needs to be accounted for to HMRC when the VAT return for that period becomes due What VAT can a GD recover? GDs cannot, under the normal rules, reclaim from HMRC the tax they incur on purchases relating to their non-business or exempt activities. Treasury funding takes into account the levels of VAT that a GD is unable to recover. VAT can only be recovered by GDs when: it is input tax incurred in the course of taxable business; it is input tax incurred on supplies that are outside the scope of VAT, but which would be taxable if they occurred in the UK; it is VAT that has been incurred in the course of contracting out those services listed in the Treasury s Contracting Out of Services Directions - see Part 3B. VAT which has been accounted for under the reverse charge mechanism - see item 1.19 below. In all cases, proper evidence must be held to support the claim. Proforma invoices are not tax invoices, even if the wording Tax Invoice appears, and cannot be used as evidence for Input Tax deduction What about VAT GDs incur in making both taxable and exempt supplies? A GD should always directly attribute as much tax as possible to its non-business and business (i.e. taxable and exempt) activities. GDs cannot, under the normal rules, reclaim from HMRC the tax they incur on purchases relating to their non-business or exempt activities [see section 1.17]. Treasury funding takes into account the levels of purchase VAT that a GD is unable to recover GDs can reclaim the tax they incur on purchases directly relating to their taxable business activities In some instances VAT incurred on a GD s purchases may relate to both its business and non-business activities. Guidance Notes for Government Departments Page 17 of 87

18 It is important to identify these instances because if a GD undertakes both business and non-business activities then it is unlikely to be able to treat all the tax it incurs as input tax. Any tax which relates: to goods or services obtained solely for the purposes of the business activity, is input tax; and solely to the non-business activity is not input tax. Under VAT Act 1994 Section 24(5) the taxpayer is required to apportion tax so that only tax which relates to its business activities is treated as input tax. Where, however, there is expenditure, which cannot be directly attributed to business or non-business activities such as costs incurred on overheads, this non-attributable expenditure must be apportioned in a fair and reasonable way. GDs should note that the law does not specify any particular method by which they must apportion the VAT incurred. Any method of doing so may be used provided that it results in a fair and reasonable apportionment of the tax bearing in mind the various activities and the purposes for which the expenditure was incurred What is the reverse charge? Normally, the supplier of a service is the person who must account, to the tax authorities, for any VAT due on the supply. However, in certain situations, it is the customer who must account for any VAT due. Although normally called the reverse charge the procedure may also be referred to as tax shift. The reverse charge applies to almost all Business to Business ( B2B ) supplies of services except those of a description in Schedule 9 of the VAT Act 1994 (Exemptions). It does not apply to land on which the option to tax has been exercised. Reverse charge is not a complicated accounting procedure. Where it applies to services which you receive, you, the customer, must act as if you are both the supplier and the recipient of the services How does the reverse charge work? This depends on whether you have received the supply of services for your non-business activities or your business supplies. You simply credit your VAT account with an amount of output tax, calculated on the full value of the supply you have received, and at the same time debit your VAT account with the VAT you are entitled to recover if the service is recoverable under the COS Direction (in the case of a nonbusiness activity and the expense is included under the COS Guidance Notes for Government Departments Page 18 of 87

19 headings) or the input tax to which you are entitled, in accordance with the normal business rules. You then include in the relevant boxes of your VAT return: The amount of output tax in box 1 VAT due on sales The amount of VAT recoverable under the relevant COS heading (for non-business supplies) and the amount of input tax (these are shown on the VAT 21 entered on-line) in box 4 VAT reclaimed on purchases The full value of the supply in box 6 total value of sales, and The full value of the supply in box 7 total value of purchases What is the effect of the reverse charge? In respect of a business supply, if you can attribute the input tax to a taxable supply you can reclaim it all. In respect of a non-business activity, you can recover that amount which you can directly attribute to a non-business activity and which the purchase falls under a COS heading. If you cannot do either of the above, the effect is to make you pay VAT on the whole or part of the supply at the UK rate. This puts you in the same position as if you had received the supply from a UK supplier rather than from one outside the UK. The Reverse Charge is explained in more detail in Notice 741 and 741A. Guidance Notes for Government Departments Page 19 of 87

20 Registration for VAT 1.22 When does a GD need to register for VAT? All private sector traders who make taxable supplies that exceed a specified annual amount are required to register for VAT with HMRC. GDs, however, are required to register for VAT regardless of the annual value of their taxable supplies Why aren t GDs subject to the normal VAT registration rules? This is because they are part of the Crown. Although certain GDs may not undertake any business activities, they are able to claim a refund of VAT on certain contracted-out services for non-business activities under Section 41(3) of the VAT Act 1994, discussed in Part 3 of these notes. If a GD is not registered, it will not be able to reclaim these refunds How will HMRC register my department for VAT? When a GD registers for VAT, it is given a 3 digit number but will also be automatically assigned a 9 digit number - which starts with 888. The 9 digit number is unique to the GD to which it is issued. This number must be shown on all tax invoices and correspondence relating to taxable supplies made. Executive Agencies and Trading Funds are usually part of their parent GD for VAT purposes, but further details may be found in Part 5 of this guidance. You should inform us of any change of circumstances or activity that could affect a GD s registration or distort the figures declared on VAT returns. GDs must use their 9 digit number on their VAT invoices. When trading with other EC Member States or importing/exporting goods they will be given a separate VAT number which should be used in these circumstances. This number must be prefixed with GB. Confirmation of GD VAT registration numbers may be obtained from the Government Departments Team. Guidance Notes for Government Departments Page 20 of 87

21 The VAT Return 1.25 How do I complete my VAT return? From 1 April 2010, GDs are required to file their VAT 100 and VAT 21 online. The first step to achieving this is to sign up and enrol for the VAT for Government and NHS online service. The enrolment process is done only once and ensures the GD s confidential information is kept secure and can only be seen by it or those it has authorised. If you want more information on online security and how to protect yourself and your organisation, go to and click on the Online Security link in the News element. You are only able to account for VAT and reclaim any relevant VAT that relates to the entity/entities included within that registration. For GD purposes, note that the online VAT 21 has been designed in such a way that VAT refundable under Treasury s Contracting Out of Services Direction is automatically transferred to Box 4 of VAT 100. Therefore, a GD s VAT return should be completed as follows: Box number What should be entered in the box Box 1 Output Tax due on sales Box 2 Any VAT due on acquisitions, (i.e. goods acquired from other EC Member States) which did not have VAT on them when purchased. Box 3 The total of Boxes 1 and 2 Box 4 The total VAT reclaimed for the period. This figure will be made up of Input Tax and /or refunds under the Treasury s Contracting Out Direction. The figure in Box 4 will match the figures you have entered into your VAT 21. Note that the acquisition tax declared in Box 2 may be recovered as input tax subject to normal VAT rules (i.e. if the goods are for taxable business activities or Business to Business supply of services. Box 5 Take the figures in Boxes 3 and 4, deduct the smaller from the larger and enter the difference in this box Box 6 Box 7 VAT exclusive value of total standard rated, zero-rated and exempt business supplies of goods and services. If you have made any supplies to the EC, these must be entered in Box 8 and Box 6. VAT exclusive value of purchases of goods and services for business activities. If you enter anything in Box 9, also include it in the Box 7 total. Guidance Notes for Government Departments Page 21 of 87

22 Box 8 Information for EC statistical purposes. Box 9 Information for EC statistical purposes. Total value of all supplies of goods to other EC Member States. If you enter anything in Box 8, you must also include the amount in Box 6. Total value of all acquisitions of goods from other EC Member States. If you enter a figure in Box 9, include the amount in Box 7 total. If the goods are standard rated there should also be a figure in Box Am I allowed to Net off? When calculating the figures for the VAT return, output and input tax on individual transactions must not be netted off. The figure for tax due in Box 3 must be the total liability for output tax, with the figure in Box 4 showing the total claim for input tax and Section 41(3) refunds. You take the figures in Boxes 3 and 4, deduct the smaller from the larger and enter the difference in Box 5. This Box then shows the net sum which is due to HMRC, or which your department is claiming from HMRC When should I recover and account for VAT? The general rule is that you should include any VAT you are entitled to recover on the current VAT return. There are, however, special rules for claiming this VAT at a later date. If you are claiming Refunds under section 41(3) (i.e. VAT recoverable from contracted out services that relate to your nonbusiness (statutory) activities Time limits for recovery Claims MUST be made in the financial year when the supply is received. There is no provision to make retrospective claims. This is because the Treasury takes into account any irrecoverable VAT during the bidding and funding process. However, you are able to include any VAT adjustments (either in your favour or in HMRC s) that were actually incurred during the past financial year in the returns covering the first three months of the following year. Thus, for example, HMRC will consider a request to include on the return for the period 1 April to 30.June, VAT incurred in February the same calendar year. Guidance Notes for Government Departments Page 22 of 87

23 Recoverable Input Tax (i.e. VAT reclaimed in respect of taxable business supplies) You can make a retrospective claim provided no more than four years have elapsed since you incurred the VAT. This is sometimes referred to as the Four Year Cap How often should my VAT return be submitted? The normal accounting period is a calendar quarter. Although you can ask to submit monthly returns if you want.. The online return Forms VAT 100 and 21 must be completed and submitted within one calendar month of the end of the VAT period. For example, for a VAT period ending on 31 March, HMRC must receive the completed VAT return on or before 30 April. The relevant dates are shown at the top of Form VAT 100 when it is accessed online. If you require further information on the online facility, please contact your CRM, Customer Co-ordinator, or DMB GABS in Southend. If a GD wants to submit monthly returns then you should contact your CRM or Customer Co-ordinator within the Government Departments Team How do I correct errors on VAT Returns? If you discover an error on a VAT return after it has been submitted, you should contact your CRM or Customer Co-ordinator within the Government Departments Team. You can either: (a) (b) (c) Give details of the errors in a letter, showing how the error arose and what action you are taking to minimise this type of error occurring again. complete a VAT 652 Form Voluntary Disclosure of errors on VAT Returns. Copies of the VAT 652 form can be downloaded from the forms and publications section of the HM Revenue & Customs website. However you will still need to explain how the error arose and what action you are taking to minimise this type of error occurring again. adjust the amount on the next return if the error is of a suitable size as given in Notice 700/45. Please remember that the covering letter or form 652 MUST give details of the adjusted return period so that the Government Departments Team is able to account for the error correctly for the relevant VAT return in question. Guidance Notes for Government Departments Page 23 of 87

24 Notice 700/45 contains more information about making adjustments on your VAT return. However; please note that the time scales mentioned in section 4 of the notice should be 1 April 2011 for GDs, whereas 1 April 2009 is applicable for other VAT registrations Overview of the penalties system Legislation requires that all errors must be considered for penalty purposes. In order that the Government Departments Team can determine the level of penalty applicable, it will need certain information from you. You will need to be able to provide evidence to the Government Departments Team showing: how the error arose; what efforts were made at the time to ensure correct treatment was applied - including any advice sought; how you identified the error and to what VAT periods the error relates; how you calculated the error; what action has been taken since then to try and prevent the error occurring in the future?. If a penalty is applicable, the Government Departments Team will take into account the extent to which you have explained this to them. Further information about penalties will be provided to you at that time. Guidance Notes for Government Departments Page 24 of 87

25 PART 2 - Sales and The Treasury Taxing Directions PART 2A - General Advice on Sales. Supplies of goods and services in the UK 2.1 What happens when my department sells goods and services to other GDs and Executive Agencies? When a GD makes supplies of goods or services to another GD, with a different VAT number, this is a supply and VAT must be charged at the appropriate rate. However, if a sale is made between parts of a GD, or between a GD and its executive agency using the same VAT number, this is not a supply for VAT purposes. 2.2 What happens when my department sells goods and services to Non Departmental Public Bodies (NDPBs)? If a GD makes taxable supplies to a NDPB, the NDPB must be treated as an ordinary customer. As many NDPBs do not undertake business activities, and are consequently not registered for VAT, they cannot recover any VAT as Input Tax or under the Treasury (Contracting-out) Directions. 2.3 What happens when an Executive Agency sells goods or services to another GD? a) Executive Agencies who share a VAT registration with a parent GD An Executive Agency which has not been given a separate GD VAT registration number will not charge VAT on any supplies it makes to its parent GD, as both will share the same GD VAT number. However, sales to other GDs will be liable to VAT at the appropriate rate. b) Executive Agencies who are separately registered An Executive Agency or Trading Fund which has been separately registered for VAT must charge VAT on their standard and reduced rated supplies, including supplies to their parent GDs. 2.4 What happens if a customer does not pay? If your customer does not pay a VAT invoice, which you have issued for a taxable supply made to them, your department may be able to reclaim relief from VAT as long as these meet the criteria for bad debts. You can find out more about this in VAT Notice 700/18 Relief From VAT On Bad Debts. Guidance Notes for Government Departments Page 25 of 87

26 Supplies of Goods outside the UK 2.5 Which countries are included in the VAT territory of the European Community? The fiscal (VAT) territory of the European Community consists of: o o o o o o o o o o o o o o o o o o o o o o o o o o o Austria; Belgium; Bulgaria Cyprus Czech Republic Denmark, except the Faroe Islands and Greenland; Estonia Finland; France, including Monaco; Germany, except Busingen and the Isle of Heligoland; Greece; Hungary The Republic of Ireland; Italy, except the communes of Livigno and Campione d'italia and the Italian waters of Lake Lugano; Latvia Lithuania Luxembourg; Malta Netherlands; Poland Portugal, including the Azores and Madeira; Romania Slovakia Slovenia Spain, including the Balearic Islands but excluding Ceuta and Melilla Sweden; United Kingdom, including the Isle of Man. Guidance Notes for Government Departments Page 26 of 87

27 There are some "Special Territories" which are within the EC customs area but outside the EC fiscal (VAT) area: o o o o o o Andorra; The Åland Islands (Finland); The Channel Islands; The Canary Islands (Spain); The overseas departments of France (Guadeloupe, Martinique, Reunion and French Guiana); Mount Athos (Greece). Goods entering the UK from the "Special Territories", will be treated as imported goods, for VAT purposes. 2.6 What happens when I sell goods to customers based in another European Community (EC) country? A GD can only zero-rate the supply of goods to a customer in another EC Member State if: the EC customer's VAT registration number (with 2 letter country code prefix) is obtained and it is shown on the invoice; and the goods are delivered to a destination in another EC country; and valid commercial documentary evidence is obtained within three months of the date of supply, and held to show that the goods have been removed from the UK. 2.7 What other documentation must I complete? You must also complete EC Sales lists showing the zero-rated sales you have made to VAT registered businesses in the other Member States. 2.8 What are EC Sales Lists (ESLs)? Where VAT registrations, including Government Departments, make supplies of goods to customers registered for VAT in other EC Member States they are required to complete and submit ESLs for these supplies of goods and related services. From 1 January 2010, you are also required to complete ESLs for intra- EC taxable supplies of services to which the reverse charge applies. Guidance Notes for Government Departments Page 27 of 87

28 2.9 How often do I have to submit ESLs? ESLs can be submitted either monthly or quarterly depending on the nature of the supplies (i.e. goods or services) and value of the supplies excluding VAT. You can submit ESLs either electronically using the ECSL Service, or by using the ESL Form VAT 101. HMRC issues VAT Form VAT 101 and 101A if they are identified as having EC sales Where can I find more information about completing my EC sales list? More information on EC Sales Lists is contained in VAT Notice 725 The Single Market and VAT Information Sheet 1/96 Filling in your EC Sales List. Further guidance is also available in the ESL guidance and in Revenue & Customs Briefs 53/08 and 02/ What happens if my EC customer is not registered for tax? If the EC customer is not registered for VAT, you must charge UK VAT and treat it as a domestic sale. It should not be recorded in Box 8. However, you must keep a record of supplies of goods despatched to non-vat registered customers in other EC Member States. This is because you may become liable to the distance selling arrangements. These arrangements state that if the value of sales to a particular EC Member State rises above that State's threshold for distance selling, the place of supply becomes that of the other Member State, and you will become liable to register for VAT there. You will have to contact the appropriate tax authority if registration is necessary. Notice 700/1 Distance Selling and Notice 725 The Single Market give more information about distance selling arrangements What is Intrastat? Intrastat is the system for collecting statistics on the trade in goods between EC Member States. If a GD has a value of trade in goods of either arrivals or dispatches above a specified value threshold, they are required to submit further information on what are called Supplementary Declarations each month. This arrangement and details of the thresholds can be found in Notice 60 Intrastat General Guide. Guidance Notes for Government Departments Page 28 of 87

29 2.13 How do I account for VAT on goods exported outside the EC? When a GD exports goods outside the EC, the goods may only be zero rated if HMRC s regulations in respect of proof of export, and any other regulations which may be in force at the time, are adhered to. If a GD purchases goods it intends to export and takes physical delivery of goods from the UK manufacturer or supplier in the UK, then it will have to pay VAT to the manufacturer or supplier but will be able to recover this by adjusting its VAT account when the goods are exported, subject to the correct proof of export being held. Please refer to Notice 703 Exports and Removal of goods from the UK for more information. Guidance Notes for Government Departments Page 29 of 87

30 Supplies of Services 2.14 Services supplied within and outside the European Community In order to determine the VAT treatment of services supplied to customers outside the UK, you will need to identify the place of supply What is Place of Supply? For VAT purposes, place of supply is the place where a supply is treated as being made or supplied. This is the place where the service will be liable to any VAT. There are a number of rules which determine where services of different kinds are made. This information can be found in: Notice 741 Place of supply of services (before 1 January 2010); and Notice 741A Place of supply of services i.e. after 1 January What services are being supplied? It is essential that you think carefully about the nature of any services that you supply (or receive). Sometimes a short hand or colloquial description will not reflect what is really being supplied. You must have a clear understanding of the nature of the services before you can identify the appropriate place of supply rule. Guidance Notes for Government Departments Page 30 of 87

31 Part 2B - The Treasury (Taxing) Direction 2.17 Recent changes Until 16 July 2012 inclusive section 41(2) of the VAT Act 1994 deemed supplies by GDs to be within the scope of VAT if they were of a type listed in a Treasury Direction ( the Taxing direction ). These were supplies which would be within the scope of VAT is supplied by other bodies, but were supplied by GDs under public law From 17 July 2012 section 41(2) has been repealed and replaced by section 41A of the VAT Act 1994, which has wider coverage in terms of the public bodies involved. The principles are still the same and GDs may, for the purposes of supplies by them to other persons, continue to rely upon the former Taxing Direction as a guide. However, the question we encourage GDs to ask is whether the goods or services being supplied could also be supplied by non-public bodies, and thus GDs and these other bodies are in competition The Taxing Direction remains in force for supplies between GDs. This may sound strange but the Taxing Direction was made under both section 41(2) (supplies by GDs in competition) and section 41(5) (supplies by one GD to another). Section 41(5) has not been repealed. This is further explained below What is the Treasury (Taxing) Direction and its purpose? The Taxing Direction originally did two things in respect of those bodies included in list 1 of the Direction and now it does one: (i) it applied VAT to certain supplies made by GDs to other persons which were made under public law provisions. GDs often carry out activities under specific statutory authority. Normally a charge made by a GD in connection with such an activity would not be subject to VAT. However, in certain cases, some services provided by GDs are, or can, also be supplied by commercial businesses which would have to apply the normal VAT rules. To prevent any potential distortion of competition, the Treasury could direct that such supplies be treated as business when provided by GDs. As mentioned in paragraph 2.18, the Taxing Direction is no longer in force for this purpose, but GDs may continue to rely upon it as a guide. Guidance Notes for Government Departments Page 31 of 87

32 ii) It continues to ensure that certain supplies made between GDs are taxed. Under the normal rules VAT does not apply to supplies made between GDs. This is because the Crown is legally seen as a single indivisible body and so any supplies between government departments are taking place within a single VAT entity. Under the normal VAT rules such transactions would not be taxable supplies. However, this causes problems when GDs make supplies of goods or services which can also be obtained from businesses in the private sector. If GDs did not charge VAT on this type of supplies, they would be undercutting the private sector and this would lead to distortion of competition as GDs may be tempted to source goods and services from other GDs to save VAT. To ensure that this does not happen, the Treasury has directed that certain specified activities must be treated as business when supplied between GDs. Effectively, it levels the playing field by breaking government up into individual businesses for certain activities, and prevents distortion of competition. It is important to note that the Taxing Direction sets out when the activity must be treated as being by way of business, but it does not specify the VAT liability which must be applied. The list contains supplies which are standard rated, reduced rated, zero-rated and exempt from VAT. It is therefore your responsibility to identify and apply the correct VAT liability. For example, supplies of land may be exempt from VAT, but disposal of surplus office equipment is standard rated Where can I find the Direction? The Taxing Direction is published in the London, Edinburgh and Belfast Gazettes. You can find the Direction by going to the London Gazette s homepage at and looking for Issues at page The current edition of the Taxing Direction was published on 10 November You are responsible for telling us of any changes in your Department s trading activities throughout the year, so that the Direction can be amended How should Output Tax due on such supplies be accounted for to HMRC? Output tax due on such supplies should be accounted for on a VAT return. Details on how to complete a VAT return, can be found in Section Guidance Notes for Government Departments Page 32 of 87

33 2.21 What activities are contained in the Direction and how should they be defined? The Taxing Direction lists a number of activities that are deemed to be business activities when undertaken by a Government Department. The table below shows the activities which appear in List 2 of the Direction and gives examples of the types of activities which can fall within the heading. Please note that the examples shown are not exhaustive. If you are in any doubt about whether the supplies you are making should be treated as business, please contact your CRM or Customer Co-ordinator, providing all the details set out in section 1.5. Table showing the heading contained in list 2 of the Taxing Direction with examples of activities which fall within them. Heading as it appears in the Direction Accommodation, including property acquisition and disposal and any related services Administration services Admission to premises and to events, e.g. entertainments, air displays etc. Advertising or publicity services Archives Attendance of staff at court or any similar place Bankruptcies and insolvency services Broadcasting services Catering, including supplies from vending machines Car leasing Computer services or goods Examples we have seen include Letting office space Letting land Sales of government buildings Purchase of land or buildings Open days where an admission charge is payable. Guided tours Fireworks displays Concerts Provision of advertising space in a publication Charges for distributing advertising material Maintenance & updating of records Where a civil servant attends court in the UK as an expert witness and a charge is made for their professional services. Sharing software with others Guidance Notes for Government Departments Page 33 of 87

34 Concessions for catering or other services Conferences, exhibitions and any related facilities or services Granting a licence to a caterer to occupy a specific kitchen and restaurant area even if the grant includes the use of kitchen or catering equipment. Organisation of conferences, symposia and seminars Organisation of exhibitions and displays Provision of lectures and speakers Construction, alteration, demolition, repair or maintenance work, civil engineering work, any related services or goods Contract or procurement services Copying or supply of any reproductions or of any documents Copyright, patents or licences to manufacture Delivery or distribution services Drainage work Electronic transfer of data Export of goods and related services Filming, replay or recording services Financial and any related services. Negotiating bulk contracts. Charges made for providing copies of official document to insurance companies, solicitors etc Granting a licence to use computer software. Allowing use of logos or insignia. These are often referred to as digitised products Photographs/ videos Downloading computer software Transfer of electronic journals Preparation of export documentation. Use of freight containers. Storage of goods prior to export. Operation of current, deposit & savings accounts Administration, payment of salaries and wages. Deductions from employees pay for insurance premiums or in compliance with an attachment of earnings order. Mortgage repayments, Union Subscriptions. Safe custody and safe transportation services Guidance Notes for Government Departments Page 34 of 87

35 Fishing licences or permits Fire service assistance Freight transport Fuel and power. Government car service Grant or assignment or surrender of any interest in or right over land, or of any licence to do anything in relation to land. Grant of a right to inspect records Goods, including goods manufactured within a Government department and sold to its staff and to other customers, stores, surplus or other equipment Grave maintenance Grounds maintenance Hairdressing Heating Hire of vehicles, machinery or equipment, with or without operator or crew Hydrographic, cartographic and similar services. Information or statistical services Right to take fish from land Includes any transport by road, sea or air Supplies of fuels for domestic use Supplies of hot water including steam. Right to park vehicles in a car park or garage. Provision of storage for bicycles. Right to take game or fish from land Mooring charges Grazing rights The sale or disposal of any capitalised asset, including vehicles, computers, and furniture, regardless of whether any Input VAT was recovered on the original purchase. Maintaining commemorative headstones & plaques. Planting trees, shrubs & rosebushes. Cutting grass Maintaining footpaths Maintaining fences Planting trees, shrubs & rosebushes Of the sort provided in hospitals, prisons or the armed forces. Please see the entry on fuel and power above. Charges for the attendance of ambulances at sporting and similar events, where the package is comprised of crewed ambulances and supporting medical staff. Topographical surveys Please note that charges made for the provision of information requested under the Freedom Of Information Act 2000 is not treated as being a taxable supply provided that the information can only be provided by your department and is not available from any other source. Guidance Notes for Government Departments Page 35 of 87

36 Inspection services Laboratory services including analysis and testing of any substance Laundry services Licensing, certification, authorisation or the granting of any rights other than rights over land Manufacturing, assembling and other services Medical services Membership subscriptions Meteorological and related services Mineral or prospecting rights Mortuary services Nursery and day-care facilities Occupational health services Passenger transport Payroll and pension administration services Pest or animal control Photocopying services Photographic services Port, airport or harbour services and related goods Washing and laundering uniforms, clothing and bed linen. Crown Copyright Software licences Care, diagnosis, treatment or assessment of patients Provision of weather forecasts Provision of data relating to weather/ climate change. Use of computer modelling to simulate weather conditions or climate change Post mortems. Refrigeration of bodies before post mortem. Transport to, from or within a place of historic interest if you also supply the right to admission. Administration, payment of salaries and wages. Deductions from employees pay for insurance premiums, Mortgage repayments, union subscriptions or in compliance with an attachment of earnings order. Laying poison Quarantine Charges made for providing copies of official documents to insurance companies, solicitors etc Piloting /Towage services Storage services in a port Loading and unloading in a port, land adjacent to a port, transit shed, airport Guidance Notes for Government Departments Page 36 of 87

37 Postal, packing or distribution services Professional services, including those of any manager, adviser, expert, specialist or consultant Publications Radio or communication services Recruitment services Research, testing, experimentation, sampling or other related laboratory services Repair or maintenance of machinery, equipment or other goods Searches Secondment of staff where such services could also be obtained from the private sector Secretarial services Security services and related goods Shipping services Slaughter, rendering and disposal of animals Social services Statistical services, including the collection, preparation and processing of data Storage facilities and related services Franking services Postage and distribution charges Please refer to the Advice Sheet on supplies of staff in the reference section of this guidance. Posters for public display Stationery items e.g. business cards, envelopes, calendars, letterheads, questionnaires CDs, DVDs, audio and video cassettes Supplies of books, pamphlets, journals and periodicals. Does not include the issue of statutory licences Interviewing Security vetting Retrieval of information from records Please refer to the supplies of staff advice sheet in the reference section Typing services Minute taking Transcription services Provision of security guards Installation of security systems door key pads, CCTV, security lighting etc Preparation of import / export documentation Allowing use of freight containers which belong to you Guidance Notes for Government Departments Page 37 of 87

38 Telecommunications Training, tuition or education and any related services or goods Transfer of milk quota leases Translation services Tree planting and afforestation Vehicle conversions Vehicle servicing and maintenance Verification of particulars of births, marriages or deaths Waste disposal Water Weighbridge services Allowing someone else to use a telecommunications mast that belongs to you. Also, please see information relating to electronic transfer of data. Supplies of training materials Provision of training courses e.g. First Aid, Lectures, Seminars. Supply of oral interpreters Written translation Forest Management e.g. thinning out Mechanics services Provision of MOT tests Providing duplicate copies of birth, death or marriage certificates Confirming information on application forms and other official forms Incineration of waste products Allowing someone else to use your incineration facilities Removal of waste that cannot be discharged into the sewers. Supplies of water and ice Ordinary water supplied in bottles as a drought alleviation or other emergency measure Supply of distilled or deionised water and water of similar purity. Supply of water for an industrial activity. Guidance Notes for Government Departments Page 38 of 87

39 Part 3 - Purchases and the Treasury Contracting Out Direction Part 3A General Information about purchases 3.1 Do any special rules apply when GDs purchase goods and services? No special rules apply when goods and services are purchased by GDs. If the good or service is subject to VAT, then a VAT-registered supplier will charge you VAT. 3.2 How do I query whether a supply is correctly liable to VAT? As it is the legal responsibility of VAT registered traders to decide the tax liability of the supplies they make, you must ensure that when seeking tenders or placing orders, suppliers are not pressured, or asked to describe their supplies in such a way as to avoid the proper tax liability. Where you wish to query a liability, you should ask the supplier to obtain a written ruling from HMRC. Only if there is a dispute should you should seek advice from us. In such circumstances, it will be necessary to provide the full details of the supplies involved, the name and address of the supplier and copies of contracts and other documents to enable the issue to be fully reviewed. Supplies of Goods 3.3 What happens if I purchase goods from countries outside the EC?. When you purchase and import goods from outside the EC, the normal customs procedures will apply. This means standard import declarations and import entries must be submitted and you will be charged customs duty and VAT at importation in the same way as ordinary business. If special arrangements are necessary, e.g. for security or diplomatic reasons, you should consult your CRM or Customer Co-ordinator. 3.4 What happens if I purchase goods from countries in the EC? Receipts of goods from other EC Member States are termed acquisitions. GDs are liable to pay VAT on acquisitions at the rate applicable in the UK, although the mechanism for paying this VAT to HMRC is not the same as that for imports from non-ec Member States. Guidance Notes for Government Departments Page 39 of 87

40 When acquiring goods from other EC Member States as the customer a GD should give its VAT registration number to the supplier in order to receive the supply of goods VAT-free. On acquisition of the goods in the UK however, VAT must be accounted for at the rate applicable to the supply of goods in the UK. This is known as Acquisition Tax. When completing a VAT return, the Acquisition Tax should be inserted in Box 2 (which is added to Box 1 to make Box 3 Total VAT due) and the value of the goods entered in Boxes 7 and 9. VAT Notice 725 The Single Market explains the procedure in detail. Supplies of services 3.5 What happens if I buy services from suppliers based outside the UK that are subject to the B2B General rule? a) You must quote your 9 digit VAT registration number (not the one starting 888) to your supplier. The supplier will then zero-rate their supply to you. b) You must then credit your VAT return with the amount of output tax calculated on the full value of the supply you have received. c) If the supply of services are directly attributable to your department s taxable activities, debit your VAT return with the input tax that you are entitled to recover. d) If the supply of services relates to your non business activities and to eligible contracted out services, the VAT can be reclaimed under the appropriate headings of the Contracting out Direction and documented on your VAT 21 claim form. e) If the supply of services relates to your department s non business activities and do not fall within the Contracting Out Direction, no further action is necessary as you have correctly accounted for UK VAT 3.6 What happens if I buy services from suppliers which fall under a special rule and are treated as being supplied outside of the EC? a) Services supplied as part of your department s business activities. If the services is treated as being taxable in i) Another EC Member State and it is received for business purposes, you may claim a refund of the VAT paid by using the 8 Th Directive Refund Procedures, as long as you are not registered for VAT in that Member State. Claims for refunds should be made using the new electronic refund procedures. You can access the services through the HMRC VAT online services webpage. A Guidance Notes for Government Departments Page 40 of 87

41 separate online application is required for each Member State from which you wish to claim. Please see VAT Notice 723 Refunds of VAT in the European Community for EC and Non-EC traders for more information. Please remember your department cannot recover VAT it incurs in another Member State via its GD VAT return ii) Any other country outside of the EC and is received for business purposes, you will be charged whatever tax is in place in the country of supply. You will not be able to recover the tax unless that country has a procedure that allows this. Any queries on this will need to be discussed with the tax authorities in that particular country and not with HMRC. b) Services purchased as part of your department s non-business activities When a GD purchases services for its non-business activities, you will be charged VAT at the appropriate rate in the country where the supply is deemed to take place. As this VAT is not UK VAT, it cannot be reclaimed under the Section 41(3) refund scheme. Guidance Notes for Government Departments Page 41 of 87

42 Part 3B The Treasury (Contracting Out) Direction 3.7 What is the purpose of the Contracting Out Direction? GDs have been encouraged to contract-out services to the private sector which had traditionally been performed in-house. It is recognised that many of these services would be subject to VAT and where they were acquired for non-business purposes, the non-reclaimable VAT could act as a disincentive to contracting-out. It was therefore decided to compensate GDs by a direct refund mechanism, which is provided for in section 41(3) of the VAT Act Under this provision, the Treasury issues a Direction, commonly known as the Contracting-Out Direction listing both the GDs that are eligible to claim refunds of VAT, and the services on which VAT can be refunded. 3.8 What is refunded? HMRC is empowered to refund VAT to GDs on contracted out services listed in the Contracting-Out Direction provided that: (a) They have been purchased for (non-business) statutory purposes; and (b) they meet the conditions of being contracted out; and (c) The claim meets any conditions that may be laid down regarding timing, form, and manner. 3.9 Where is the Direction published? Like the Taxing Direction, the Contracting-Out Direction is published in the Belfast, Edinburgh and London Gazettes. The last published version of the Treasury s Contracting-Out Direction is featured in the editions dated on 10 January You can view a copy of the Gazettes online by visiting the London Gazette s homepage at You should then look for issues page 306 Guidance Notes for Government Departments Page 42 of 87

43 3.10 Can additional services be added to the Direction? Yes. From time to time, the Treasury reviews the Direction. At the start of this process the Treasury will ask each department for details of any changes (including deletions) which should be considered for inclusion in the new Contracting-Out Direction. This process allows departments the opportunity to update their information - for example, departments and agencies that have been rebranded following machinery of government changes. You must also consider whether there are any existing headings in the direction which are no longer required. Departments may also ask the Treasury to consider adding a new heading to Direction. In order that the request can be fully considered, the Treasury requires that GDs submit a full business case, detailing the reasons why a new heading is needed. It is important to include full details of the financial implications for your department. Where requests for new headings are made outside the Treasury review process, these should be sent to your CRM or Customer Co-ordinator within the Government Departments Team so that they can be formally passed to the Treasury for consideration Who can claim refunds under the Direction? The following bodies can claim refunds of VAT on the purchase of services detailed in list 2 of the Direction, provided these are used for non business activities: Houses of Parliament, Government departments which are recognised as such by the Cabinet Office, Welsh Government, Scottish Government or Northern Ireland Executive and the devolved administrations themselves, certain agencies of government departments, Named NHS bodies, Crown NDPBs With the exception of Parliament, the bodies entitled to claim refunds of VAT are either detailed in List 1 of the Direction, or will have been advised separately by HMRC that they can claim pending the next revision of the Direction. We accept that normal machinery of government changes, for example where the responsibilities of Department X are transferred to new Departments Y and Z, are automatically covered you do not need separate authority from HMRC. Guidance Notes for Government Departments Page 43 of 87

44 Please note - The Direction does not extend to Non-Departmental Public Bodies other than Crown NDPBs, or to bodies such as Advisory Committees How are such refunds made? Any VAT to be reclaimed, whether input tax resulting from a business activity or Section 41(3) refunds, should be recorded on the same VAT return as that used to declare Output Tax on business activities. See section 1.25 for more details. A GD should obtain VAT tax invoices from its suppliers that clearly describe the supply received. The VAT charged should be shown as a separate item What activities are contained in the Contracting Out Direction? In the following table we reproduce in bold print the headings as they are shown in the Direction, and then we provide some explanatory notes based on cases where our advice has been requested or discussions with the Treasury. These notes are not exhaustive in that they cannot cover every situation. Therefore if you need further advice, please contact your CRM. It is particularly important to note that the headings in the Direction should be interpreted in a purposive manner, and therefore in the context of the rationale for refunding VAT namely that VAT should not dissuade departments from contracting out services if this is the most efficient and cost-effective thing to do. The last published Direction was in However the Treasury subsequently undertook its periodic review of the Direction and although a replacement Direction was agreed, it has not been published. We therefore show the revisions agreed by the Treasury in italics. Since that review, departments have requested some new headings and those requests have been agreed and are awaiting a further revision of the direction. We mention these in paragraph Guidance Notes for Government Departments Page 44 of 87

45 1. Accounting, invoicing and related services Excludes: Auditing a GD s financial accounts. Hire of accountants to carry out tax health checks - Please refer to Advice Sheet 1 Use of Tax Advisors. Internal audit reports - these deal with efficiency and any VAT incurred can be recovered under heading 52. Recovery is allowed as GDs have never been allowed to do their own auditing it has to be done by another body - now the National Audit Office. 2. Administration of the following Career development loans Certificates of Experience Government support payments to the Railway Industry Pensions funds Grants and awards Services supplied under the Companies Acts and the Patents and Trademark Acts Teacher s Superannuation Scheme Vehicle Excise Duty refunds Winter fuel payment scheme Inherited State Earnings Related Pension Scheme Student Loan Scheme Fast Track Teaching Programme It is important to note that the heading can only be used to recover costs which relate to the named programmes. New programmes can only be added to the list by agreement with HM Treasury. 3. Administration and collection of toll charges 4. Aerial photographic surveys and aerial surveillance 5. Agricultural services of the kind normally carried out by DEFRA The wording of this heading was amended in 2008 when the Farming and Rural conservation Agency was abolished under a machinery of Government change. The heading can be used by the departments of the devolved administrations which have assumed responsibility for such activities from DEFRA. Guidance Notes for Government Departments Page 45 of 87

46 6. Alteration, repair and maintenance of road schemes, except (a) any works carried out pursuant to an agreement under section 278 of the Highways Act 1980 or (b) works involving construction on land not already used for road schemes Please refer to The Advice Sheet 3 in the Reference section for more information. 7. Broadcast Monitoring Services Includes: Recording news and TV programmes which are relevant to the work of a government department. Recording radio programmes Providing a digest of a departments coverage in the broadcast media 8. Cartographic Services Includes: Mapping services Topographical surveys Preparation of bespoke maps 9. Cash in transit services For example, the secure transport of cash 10. Catering Includes: Food prepared and facilities supplied by a contract catering service. Hire of agency catering staff and domestic staff relating to catering. Excludes Purchases of food or drinks alone. Sandwich/food delivery services. 11. Ceremonial services Includes: Erecting seating and stands for dignitaries and the general public. Putting up flags and bunting. Hire of portable toilet facilities. Putting up and dismantling crowd control barriers. Hire of PA systems Laying the red carpet Guidance Notes for Government Departments Page 46 of 87

47 Excludes: Recovery on goods, for example the purchase of flags, flowers red carpet food or drink for hospitality purposes fireworks that are to be used in a display. 12. Childcare services This heading allows departments to recover VAT incurred on the provision of crèche facilities or holiday play schemes operated by GDs for the benefit of their own employees. Please note that the heading excludes crèche facilities provided by a nursery /play group registered under the Children s Act 1989 as such supplies are exempt from VAT. 13. Collection, delivery and distribution services This applies to services provided by couriers, Rail Freight, Federal Express, UPS etc. Some services provided by Royal Mail are exempt from VAT. 14. Computer services supplied to the specification of the recipient Includes: the provision by one or more suppliers of a fully managed and serviced computer infrastructure either using the recipients own hardware or hardware provided by the supplier as part of the infrastructure; and the development, delivery and support of bespoke software. Excludes: supply and support of off-the-shelf software ; hire of hardware alone; line rental alone; telephony; and hire of computer consultants to add expertise to in-house IT teams. Previously the scope of the heading reflected the PFI type procurements common in IT where the infrastructure had to be provided by a single provider on hardware owned by the provider. Treasury have recognised that the use of single providers is no longer viewed as always giving the best service and that for security and continuity reasons departments may wish to retain ownership of the hardware (even though under a PFI arrangement this decreases the transfer of risk from the department). Guidance Notes for Government Departments Page 47 of 87

48 15. Conference and exhibition services Includes: A composite facility which could include supplies of staff, hire of venue, equipment, hotel accommodation, catering etc. There must be more than accommodation and catering. GD staff running a conference themselves and contracting out the venue, equipment and perhaps catering. The keyword is services. To qualify for recovery GDs must be receiving more than a supply of accommodation and catering. Excludes: The hire of venues alone The hire of hotel accommodation on its own. VAT incurred when a civil servant stays in a hotel room and receives a supply of hotel accommodation on its own. This charge may sometimes be referred to as conference or delegate rates. 16. Debt Collection Includes the provision of services by a professional debt collection agency. 17. Departmental staff records and payroll systems including administration and payment of pensions This heading excludes the Administration of child care vouchers. Following the CJEU judgement in Astra Zeneca (C-40/09) benefits by way of salary sacrifice are treated as business and COS doesn t apply. Further information can be found in Revenue & Customs Briefs 28/11 and 36/ Employment advisory services as directed by the Race Relations Act Engineering and related process services This heading is designed to allow recovery on manufacturing and the related commissioning processes. 20. Environmental protection services of the kind normally carried out for the Department of the Environment, Food and Rural Affairs VAT recovery is allowed on contracted out services which contribute to protection from floods, coastal erosion, disease prevention precautions. The heading can be used by the departments of devolved administrations which have assumed responsibility for such activities from DEFRA. Guidance Notes for Government Departments Page 48 of 87

49 21. Estate management services Covers property where a GD holds either the leasehold or the freehold. Applies when a contractor manages and runs a building for you. For example, when an estate agent is responsible for arranging the payment of rents and other charges. May include utilities charges that are included as part of the unitary charges. 22. Export intelligence services 23. Filming, audio-visual and production services Includes: Commissioning a company to make in-house training films. Filming briefings meetings or conferences. 24. Health Promotion activities Includes: Stress awareness campaigns Giving up smoking campaigns. 25. Hire of reprographic equipment including repair and maintenance. Allows recovery on USE ONLY of reprographic equipment. The provider retains ownership and responsibility for them. Excludes: Hire of Fax machines, as these are not reprographic equipment. Consumable goods such as toner and copier paper. 26. Hire of vehicles, including repair and maintenance Allows recovery on USE ONLY of hire vehicles. The provider retains ownership and responsibility for the vehicles. Applies only where a GD places a contract with a trader to supply vehicles AND provide repair and maintenance. The supplier MUST carry out the repair and maintenance. Includes: Pool cars Excludes: Hire of vehicles alone Arrangements where the GD carries out the repair work itself, or contract this out to another body Short term car hire Guidance Notes for Government Departments Page 49 of 87

50 27. Insolvency services The costs of Insolvency Practitioners may be recovered under this heading only if it can be demonstrated that that they are working under contract to a GD and that their services are being provided to the GD. In many cases Insolvency practitioners are seen as providing their services to the business under their supervision and any VAT charge is proper to that entity Interpretation and translation services This includes simultaneous interpretation services provided in person at events or meetings or via telephone. Translation of documents. 29. Issue of documents to, and control of bingo halls and off-course bookmakers 30. Issue of Documents under the Wireless Telegraphy Act 31. Laboratory services Includes: Drug testing Forensic testing Excludes: The provision of laboratory consumables reagents, chemicals, test tubes 32. Laundry Services For example: towel hire, towel cleaning/provision laundering of uniforms 33. Library services Use of external libraries such University libraries or independent academic libraries. Excludes: subscriptions to publications subscriptions to electronic journals Guidance Notes for Government Departments Page 50 of 87

51 34. Maintenance and care of livestock and fauna in connection with the Royal Parks Includes: Veterinary costs Tree surgeons services Vaccination programmes 35. Maintenance, non-structural repair and cleaning of buildings Covers property where a GD holds either the leasehold or the freehold. Includes: Non structural repairs funded from running costs Window Cleaning Contract cleaning Re-painting existing external structure. Maintenance of grounds and gardens adjacent buildings. Repair of existing suspended ceilings Repainting Replacing worn flooring with the same type of covering: i.e. replacing carpet with carpet, linoleum with linoleum Excludes: Non-structural repairs funded from capital expenditure The conversion of office space from small offices to open plan or vice versa Installation of suspended ceilings - as this alters the dimensions of the existing structure Extensions Widening doorways Supply of cleaning materials or equipment alone Upgrading worn floor covering - i.e. replacing linoleum with carpet, or replacing carpet with wood flooring etc 36. Maintenance and repair of civil engineering works Includes: Repairs to existing bridges, Repairs and maintenance to existing drains Excludes: Repair and maintenance of road schemes. This work falls under COS 6 New civil engineering projects Supplies carried out under s278 agreements (refer to Sheet 3) Guidance Notes for Government Departments Page 51 of 87

52 37. Maintenance, repair and cleaning of equipment, plant, vehicles and vessels This heading allows departments to recover VAT on repair and maintenance costs as follows: Includes: equipment, plant vehicles and vehicles owned by a department, equipment, plant vehicles and vessels which are leased, provided that the repair and maintenance work is provided by different supplier. spare parts which are provided as part of the eligible repair and maintenance services. Repairs to existing lifts Excludes: the lease arrangement itself (this is a supply of goods & VAT is not recoverable under COS) Installation of new lifts Complete replacement of central heating and air conditioning systems. Treasury has additionally confirmed that recovery of VAT under this heading can be extended to equipment, plant, vehicles and vessels leased by a department from a separate supplier to the one providing the maintenance. Recovery on this basis was allowed with effect from 1 April Before this, recovery was restricted to equipment, plant, vehicles and vessels owned by a department. Treasury have agreed that the previous restriction did not take sufficient recognition of the fact that many departments gain benefit in leasing rather than purchasing this sort of item outright. The leasing or hire of equipment, plant, vehicles and vessels is however a supply of services and any VAT incurred in respect of this is NOT recoverable. The only exceptions to this are headings 25 Hire of reprographic equipment including repair and maintenance and 26 Hire of vehicles, including repair and maintenance. In both these cases the VAT is only recoverable on contracts for the supply of the equipment /vehicles together with full repair and maintenance services. 38. Maintenance and repair of statues monuments and works of art Includes: Cleaning Restoration costs Removal & re-location costs. Excludes: Expenses relating to the design and installation of new monuments. Guidance Notes for Government Departments Page 52 of 87

53 39. Medical and social surveys This heading is specifically designed to allow recovery on surveys which were previously carried out in house by Government Departments and which are now outsourced to private sector providers. This type of survey is most typically conducted amongst other public bodies such as local authorities, police authorities; health authorities, charities etc and the information gleaned is used to inform future planning and policies. Other types of survey may also be eligible for recovery but the key criteria is to demonstrate that they: are medical or social in nature and, would have previously been undertaken in house by a GD. Excludes: MORI Polls as these have always been undertaken by independent external bodies to conduct opinion polls 40. Messenger, portering and reception services Includes Collection and distribution of internal mail by a private company Excludes: The hire of telephone equipment /telephone lines or switchboard equipment alone. Hire of agency staff to supplement in-house services during peak times or to cover leave 41. Nursing services Such as agency nurses Excludes: other types of medical professionals such as doctors, locums. 42. Office removals Includes: Office relocation contractors Provision of removal services Crate hire when part of a removal contract Contractors moving office accommodation. i.e. from one floor to another Excludes: Crate hire alone Guidance Notes for Government Departments Page 53 of 87

54 43. Operation and maintenance of static test facilities, engineering and support services and test range industrial support and security/safety services including those acquired for the purposes of research and development 44. Operation and maintenance of stores depots. Includes Monitoring stock levels. Dealing with requisition requests. 45. Operation of hospitals, health care establishments and health care facilities and the provision of any related services This heading is concerned with the provision of a fully operational and managed hospital or healthcare facility, where most services short of medical and nursing services are supplied to the NHS by the provider. Includes the ancillary provision of equipment together with the service of operating and maintaining that equipment, utilities when provided as a part of the whole package and paid for within the single unitary charge. Excludes Hire of medical equipment alone. 46. Operation of prisons, detention centres and remand centres, including medical services Includes Operation of prison shops Prisoner transport. Operation of prison hospitals Excludes: Hostel accommodation Guidance Notes for Government Departments Page 54 of 87

55 47. Passenger transport services Includes Taxi firms that supply taxis to staff on request provided the GD has entered into a contract with the firm and receives a tax invoice. E.g. late night car services Chauffeur driven cars Excludes: Public transport costs (these are already zero-rated). Road tax Passenger insurance. Staff members hailing cabs in the street or picking up a taxi from a taxi rank. 48. Pest control services Includes: setting of traps spraying insecticide laying down poison removal of dead rodents Excludes: the purchases of poisons/traps on their own 49. Photographic, reprographic, graphic and design services Includes: Hire of a photographer Design & printing of annual reports. Bulk copying services. Excludes supplies of goods such as: Purchase of photocopiers etc. Printing of business cards and headed stationary. Printing of office signage 50. Preparation and despatch of forms Includes design printing and mailing of forms providing these services are provided within a single contract. Guidance Notes for Government Departments Page 55 of 87

56 51. Press cutting services 52. Professional Advice or opinion on departmental efficiency or policy issues, legal advice or opinion and internal audit. The wording of this heading has been changed with Treasury agreement from Professional services, including those of any manager, adviser, expert, specialist or consultant. The change in wording is designed to clarify the scope of recovery under the heading. The new wording reflects that heading 52 is essentially concerned with for the provision of advice or information on how to affect something. The scope of this heading is much narrower than it may first appear. The heading only allows VAT recovery in respect of advice on how to do or improve departmental activities. Includes: Internal audit reports Legal opinions from solicitors Hire of consultants to provide advice on efficiency issues or comment on the viability of new departmental initiatives. Excludes: The hire of a consultant to work as part of the Department. Research - this is covered by headings 20,58,59,66 or 74. The service of actually putting something into effect, as opposed to merely advising on a matter. For example, this heading does not include the services of a doctor who advises AND then treats a patient. Similarly, The services of a professional who is brought in to advise on AND then implement a new initiative. Staff secondments - because this involved contracting in staff to work along side. Specialist staff hired to provide holiday/ maternity cover for key staff members. Hire of accountants to carry out tax health checks - Please refer to Section iv above. Guidance Notes for Government Departments Page 56 of 87

57 53.Provision under a PFI agreement of accommodation, for office or other governmental use, together with management or other services in connection with that accommodation This heading covers PFI arrangements under which GDs are supplied with fully serviced and managed accommodation by a single PFI provider. The most distinct element will be that risk is transferred from the GD to the PFI provider. Consequently, the heading does not include leases granted by commercial landlords, even where they are landlord repairing and insuring leases. If the building is used for Standard-rated business activities Input Tax can be reclaimed under the normal VAT rules. Exempt business activities Input Tax cannot be recovered Government Non-business activities* If building is occupied under a normal commercial lease the type of lease will invariably include, the landlord s obligation to maintain the building (for example, heat, light, utilities, cleaning, repairs and maintenance, and insurance); and, among the tenants obligations, a covenant to pay rents and service charges you cannot claim a refund under section 41(3.) If you occupy the building under a PFI arrangement - you may claim a refund of VAT under Heading 53 of the Treasury s (contracting out) direction.. * If you are unsure about the terms under which you occupy the building, please contact your department s procurement section. They will be able to advise whether your department is occupying the building under a normal commercial lease or has entered in to a Treasury approved PFI arrangement. More than one type of use. -The VAT must be apportioned between the business and non-business uses. Guidance Notes for Government Departments Page 57 of 87

58 54. Publicity services Includes: Advertising campaigns other than recruitment adverts (which are covered by heading 57) Excludes: GDs commissioning promotional items such as mugs, T-shirts, stickers etc. This is a supply of goods for VAT purposes and as such falls outside the scope of the Direction. GDs reclaiming VAT charged on the placement of individual advertisements in a newspaper. 55. Purchasing and procurement services Eligible activities include: Negotiating procurement contracts Management and coordination of bulk orders 56. Radio services Includes radio broadcasting. radio bandwidth Excludes Purchase of radios or radio equipment alone 57. Recruitment and relocation of staff and other related services Includes: Security vetting checks undertaken on employees. Staff relocation expenses where the department commissions the removal company. Staff recruitment advertising commissioned via a recruitment agency. Excludes: VAT incurred on removal firms hired by staff Placing recruitment adverts in a newspaper 58. Research, testing, inspection, certification and approval work for the Health and Safety Executive Devolved administrations discharging functions on behalf of the HSE may recover VAT on contracted out services under this heading. Guidance Notes for Government Departments Page 58 of 87

59 59. Scientific work of the kind normally carried out for the Department of the Environment, Food and Rural Affairs and the Food Standards Agency Includes: Testing contaminated food to identify strains of bacteria e.g.; Salmonella. Detection and verification of disease in animals - BSE. Detection and verification of plant disease e.g. Dutch Elm Disease Inspection of diseased animal carcasses This heading may be used by Departments in the devolved administrations if they have taken over responsibility for work undertaken by DEFRA or the Food Standards Agency. 60.Security services Includes: The security guarding of a building and such goods e.g. surveillance cameras / CCTV, which are an essential part of that service. Excludes: Purchase of surveillance equipment and other goods alone. Security vetting. Hire of security staff to supplement in house security teams at busy times or to provide holiday cover. 61. Services of printing, copying, reproducing or mailing of any documents or publications, including typesetting services Includes: Post opening services Franking Labelling services Parcel X raying services Excludes: Post box hire Shredding machines Franking machines 62. Share Registry Survey Guidance Notes for Government Departments Page 59 of 87

60 63. Storage, distribution and goods disposal services Includes: Records sent for archiving or destruction. Storage of detained or seized items Secure disposal of seized items Accommodation of seized or detained animals in zoos or boarding kennels Storage of employees possessions when they are relocated. Incineration services Secure bulk shredding services. 64. Surveying, certification and registration in connection with ships and relevant record-keeping and verification, issue of certification cards, discharge books and campaign medals to seamen 65. Training, tuition or education While there is no general restriction under this heading, you should note that education and vocational training is exempt from VAT (and thus there is no VAT to recover) if it is provided by one of the eligible bodies listed in Notice 701/30: Education & Vocational Training. In practice these are: a) Schools for the under-19s b) Universities c) Further and Higher Education Colleges d) Other public bodies e) Non-profit making bodies that reinvest surpluses of income back into the courses they provide. 66. Transport research of the kind normally carried out for the Department of Transport. Departments in the devolved administrations which carry out functions delegated to them by the Department of Transport may recover VAT incurred on transport research under this heading. 67. Travel services, excluding hotel accommodation and fares Includes: Travel arrangements provided by an external booking agency Charges for use of VIP lounges at airports and stations. Excludes: Public transport fares as these are zero-rated. VAT paid by third parties in respect of taxis and hire cars. The recovery of VAT on hire cars and taxis depends on the arrangements with the provider and who is receiving the supplies, the GD or the individual. Guidance Notes for Government Departments Page 60 of 87

61 68. Travel and transport surveys, including traffic census counts 69. Typing secretarial, telephonist and clerical services including agency staff Includes: VAT incurred on supplies by agencies providing typing, secretarial, telephonist and clerical services using their own staff. Provision of typing services by a word processing bureau. Excludes: Secondees Employee expenses. If agency staff are utilised because of difficulties in recruiting staff to fill permanent posts or are brought in to supplement existing staff levels during busy periods then these would not satisfy the criterion of being a contracted out service for these purposes and consequently any VAT incurred would not be recoverable. 70. Waste disposal services Includes: refuse collection trade waste feminine hygiene services Clinical waste Recycling services 71. Welfare services Includes: Staff support services Counselling services provided to staff in the aftermath of major incidents 72. Career guidance, mentoring, counselling and other related services to help people in to work or to retain work as part of the DWP/Jobcentre Plus Employment Programme, provided under sections 2 and 9 of the Employment and Training Act This heading is now left blank intentionally The old heading which allowed recovery on mentoring and counselling to help people in to work as part of the New Deal and ONE Programme has been withdrawn. This is because activities which used to fall under this heading have largely been absorbed in to the newly reworded heading 72. Guidance Notes for Government Departments Page 61 of 87

62 74. Original research undertaken in order to gain knowledge and understanding While there is no general restriction under this heading, we interpret the term original research as meaning research that: a) Involves surveys, field tests or new research design thinking, interviews or observation conducted specifically in relation to the subject of the research (as opposed to merely collating existing data); and b) Extends to secondary data analysis, interpretation (which may include options and/or recommendations) or a systemic review of evidence (rather than mere data gathering and recording) You should note that research is exempt from VAT (and thus there is no VAT to recover) if it is provided by one of the eligible bodies listed in Notice 701/30: Education & Vocational Training. In practice these are: a) Schools for the under-19s b) Universities c) Further and Higher Education Colleges d) Other public bodies e) Non-profit making bodies that reinvest surpluses of income back into the courses they provide. 75. Inspection of woodland sites for approval of felling licence applications and of timber imports/imports using timber packing to prevent entry of foreign tree pests and diseases 76. Probation Services delivered under the Criminal Justice and Courts Services Act 2000 Guidance Notes for Government Departments Page 62 of 87

63 3.14 These services have been agreed by the Treasury for inclusion in the next revision of the direction. You may recover VAT incurred in relation to these. (i) Call centre and contact centre services. VAT incurred by Consumer Direct Call Centres can be recovered from 1 April No entitlement to recover VAT prior to this date. All other call centres can recover VAT from 1 April No entitlement to recover VAT prior to this date. Includes: VAT incurred when a GD contracts out the management and day to day operation of Contact Centres and Call Centres to third parties, and VAT incurred on the associated costs which are recharged by their suppliers. In so far as VAT is chargeable, VAT charged on the outsourced operation of the NHS 111 service. Excludes VAT incurred on overheads relating to the provisions of in-house call centres and contact centres. (ii) Services provided through International Trade Advisers for UK Trade and Investment. Can recover VAT from 1 April No entitlement to recover VAT prior to this date. (iii) Services provided under Framework for Procuring External Support for Commissioners (FESC) other than: a. Supplies of computer services and professional services that are excluded from the scope of headings 14 and 52 above, unless the Treasury directs otherwise. b. Elsewhere, the supply of staff. Can recover VAT from 1 April No entitlement to recover VAT prior to this date. Guidance Notes for Government Departments Page 63 of 87

64 PART 4 Government Departments in Northern Ireland. 4.1 Business activities of Government Departments in Northern Ireland. Any business activities carried out by Northern Ireland Departments are subject to the guidance given in Part 2 and Part 2B of this guidance. Northern Ireland departments need to refer to these sections of the guidance for advice on how to treat supplies they make to their customers. 4.2 Non Business activities of Government departments in Northern Ireland What is section 99 of the VAT Act? Government departments in Northern Ireland (GDNIs) do not receive refunds of VAT under the Treasury (Contracting Out) Direction. A different refund scheme is necessary because GDNIs have far wider remits than their counterparts in the rest of the UK; for example being directly responsible for the delivery of education and health services. Section 99 of the VAT Act sets out a special scheme for the departments Which departments are eligible for refunds under section 99? The Department of Finance & Personnel is responsible for advising who can be treated as a Government department in Northern Ireland. Non- Departmental Public Bodies (NDPBs) are not included in Section What can be recovered under section 99? The proportion of VAT incurred relating to non-business activities may be recovered under section 99. A GD in Northern Ireland (GDNI) should always directly attribute as much tax as possible to its nonbusiness and business (i.e. taxable and exempt) activities. Each GDNI should have a method of business / non-business apportionment. The apportionment needs to be fair & reasonable and be agreed with the Department of Finance & Personnel in Northern Ireland. Guidance Notes for Government Departments Page 64 of 87

65 The percentage is applied to purchase of goods and services to calculate the VAT recoverable under the section 99 refund scheme. This percentage can be applied to the following types of transactions: a) Supplies of goods or services purchased in the UK b) Goods purchased from other EC Member States c) Goods purchased from outside the EC VAT incurred on business activities is reclaimed subject to the normal rules What is excluded from section 99? Tax incurred on services purchased from suppliers in other Member States for non-business purposes cannot be recovered under section 99. This is because the refund scheme only applies to UK VAT. 4.3 GDNIs and purchases of cross border services. On 1 January 2010 new place of supply rules came in to force. These changes affect the way that VAT is accounted for on cross border supplies. Please refer to paragraph 2.15 for further information What happens if I buy services from suppliers which are treated as being supplied in the Republic Of Ireland? (1) Services supplied as part of your department s business activities. If the service is treated as being taxable in Republic of Ireland and it is received for your department s business purposes, you may claim a refund of the VAT paid by using the 8 th Directive Refund Procedures. Claims for refunds should be made using the new electronic refund procedures. Please see VAT Notice 723 Refunds of VAT in the European Community for EC and Non-EC businesses for more information. Please remember your department cannot recover VAT it incurs in another Member State via its GD VAT return. (2) Services purchased as part of your department s non-business activities When a GDNI purchases services for its non-business activities, you will be charged VAT at the appropriate rate in the country where the supply is deemed to take place. As this VAT is not UK VAT, it cannot be reclaimed under the Section 41(3) refund scheme. Guidance Notes for Government Departments Page 65 of 87

66 Part 5 Government Departments, Executive Agencies, Trading Funds and Non Departmental Public Bodies (NDPBs) 5.1 What is the definition of a Government Department (GD)? The definition of what is a GD, or a part of a GD, is often difficult to determine. If there is any doubt about the status of a new body, you should contact the Cabinet Office Domestic and Economic Secretariat or devolved administration for guidance, before applying for a GD registration. As stated above in section the Department of Finance and Personnel decides whether bodies in Northern Ireland can be classed as GDs. 5.2 What are Executive Agencies? Executive Agencies are legally part of central Government, as are Trading Funds. They can be divided into the following categories: (a) Executive Agencies & Trading Funds who share a VAT registration with a parent GD Executive Agencies and Trading Funds which continue to operate under the GD VAT registration number of the parent GD may continue to use that registration and be included in the reference to the parent GD in the Treasury (Taxing) Direction and the Treasury (Contracting-Out) Direction (but see Paragraph 5.4 and 5.5 below about contracting-out refunds and Trading Funds). They will not therefore be required to submit independent VAT returns. In such circumstances, supplies between an Executive Agency or Trading Fund and its parent GD are not supplies for VAT purposes and such transactions are not subject to VAT. The normal rules apply when supplies are made to all other customers. Please note: Executive Agencies and Trading Funds are not, for the reasons explained above, automatically given separate GD VAT registration numbers. However, HMRC will consider requests for independent VAT registration if such a request is endorsed and supported by the parent GD. (b) Executive Agencies with a separate VAT registration. If separate GD VAT registration is granted to an Executive Agency or Trading Fund, they will be treated as a separate GD. A separately registered Executive Agency must: Guidance Notes for Government Departments Page 66 of 87

67 a. Appoint a VLO; b. Have its own reference in the Treasury (Taxing) Direction; and c. Ask to be added to the Treasury (Contracting Out) Direction if it requires the refund of VAT on services for its non-business activities What is the VAT position of supplies between a separately VAT registered Executive Agency or Trading Fund and its parent GD? In most cases, supplies between a separately registered Executive Agency or Trading Fund and the parent GD are likely to be business activities. As a result, where the supplies are subject to VAT at the standard rate, VAT must be charged. This is something that should be considered by both the Executive Agency and the parent GD when deciding whether to apply for separate VAT registration. 5.4 Trading Funds A Trading Fund will in general only be involved in business activities. It is likely, therefore, that a Trading Fund will not be in a position to recover any VAT under the Treasury (Contracting-Out) Direction. Subject to whatever activities Trading Funds undertake, they may be affected by the changes in the Option to Tax Rules (see Advice Sheet 8 on land and property in the reference section at the end of these guidance notes). Where a Trading Fund is engaged in making exempt as well as taxable business supplies then it may, subject to approval by the Treasury and in conjunction with the Government Departments Team, adopt a partial exemption method. This will enable a Trading Fund to apportion its input tax. 5.5 What happens when GDs become Executive Agencies or Trading Funds? If An entire GD becomes an Executive Agency An entire GD becomes a Trading Fund Part of a GD becomes an Executive Agency or a Trading Fund Then Its VAT position will remain unchanged. It is likely that no VAT can be refunded via the Contracting Out Direction For VAT purposes, it will remain part of the parent GD unless an application is made to HMRC for independent GD VAT registration. Guidance Notes for Government Departments Page 67 of 87

68 5.6 Executive Non-Departmental Public Bodies (NDPBs) According to the Cabinet Office s own guidance NDPBs are NOT GDs. The term NDPB has been in existence since 1980 when it was coined by Sir Leo Pliatsky in his Report on Non Departmental Public Bodies. An NDPB is described as: A body which has a role in the processes of national government, but is not a government department, or part of one, and which accordingly operates to a greater or lesser extent at arm s length from ministers. This means that they do not fall within the provisions of Section 41 of the VAT Act 1994, and they are thus subject to the normal VAT rules and requirements. While in England the Cabinet Office decided which organisations are NDPBs, in Northern Ireland, Scotland and Wales it is the devolved administrations which decide this. A VAT-registered NDPB can, subject to the normal VAT rules, recover the VAT incurred on the purchase, importation or acquisition of taxable goods and services used to support its taxable activities. VAT incurred in other circumstances is unlikely to be recoverable. A NDPB will be registered for VAT in its own right if it is what as known as a Crown NDPB or is described in a Statute as an emanation of the Crown. 5.7 What happens if a GD makes taxable supplies to a NDPB? If a GD makes taxable supplies to a NDPB, the NDPB must be treated as an ordinary customer and so VAT should be charged as appropriate. It should be noted that some NDPBs are not able to register for VAT because they do not undertake any business activities. You may receive queries from them about the VAT charges because they are unable to recover VAT as Input Tax or receive refunds of VAT under the Treasury Contracting out Direction. Guidance Notes for Government Departments Page 68 of 87

69 Reference section This section contains more detailed reference material about common issues which GDs may encounter. To ensure that this guidance provides advice on current hot topics, The VAT Supply Team will issue periodic updates. List of Topics: 1. Funding. 2. Supplies of Staff 3. Section 278 Agreements and Hybrid Road Schemes 4. Land and Property 5. Money Laundering Regulations - refer to HMRC information 6. VAT and flexible benefits for employees (Salary Sacrifice) Guidance Notes for Government Departments Page 69 of 87

70 Advice Sheet 1 Project Funding Issues This information sheet explains the potential funding issues which GDs need to consider. We would recommend that you refer to this when referring a query to your CRM or Customer Co-ordinator within the Government Departments Team. This advice sheet is designed to help VLOs and project teams working within GDs consider the impact of VAT on new projects. Please consider VAT at the early stages of a new project. Three Key Questions: To help avoiding project shortfalls we have devised 3 key questions. By asking the right questions about VAT at the start of the project GDs can avoid last minutes funding shortfalls. The key questions are shown in bold text. These questions are followed by a brief explanation which sets the questions into context together with details of the impact. 1. What does the funding represent? a) Background. When money is paid over to another body it can be called many things. Often the transfer of money relating to projects is referred to as: Grants Funding Reimbursements Retrospective discounts Donations b) Potential impact What ever the terms used to describe the transfer, you must be clear about what the transfer represents. 2. Is the transfer of money directly linked to the provision of goods or services to specific persons? Background If the transfer of money is directly linked to the provision of goods or services which are to be used by the body transferring it, then the money is treated as Guidance Notes for Government Departments Page 70 of 87

71 a consideration. In other words the money is seen as a payment for the goods or services and will be treated as being within the scope of VAT. Potential impact The VAT inclusive amounts will have to be considered as part of the project costs. 3. Is money transferred to enable another body to allow it to achieve its aims? Background If money is transferred to a body to help them achieve their own objectives and the payer receives nothing in return other than the confirmation that the money has been spent as promised, then the payment is likely to be outside of the scope of VAT. Potential impact If the monies handed over are outside of the scope of VAT you need to consider whether the body receiving the funding is subject to any input tax restriction. If the recipient of the funding is not able to reclaim VAT on purchases made using the funding, the amounts of money transferred will need to be based on the gross cost of carrying out the project. Please Remember It is the supplier s responsibility to determine the nature of his activities and to charge VAT accordingly. GDs must not attempt to influence a supplier to act in a particular way. Suppliers situations vary. Any Questions? If you have any questions about the impact of VAT on your project, please approach your CRM or Customer Co-ordinator. Guidance Notes for Government Departments Page 71 of 87

72 Advice Sheet 2 Supplies of Staff What are supplies of staff? You make a supply of staff for VAT purposes if you provide to another person, for payment, the use of an individual who is contractually employed by you. This applies whether the terms of the individual s employment with you are set out in a formal contract or letter of appointment, or are on a less formal basis. The determining factor is that the staff are not contractually employed by your customer, but come under the direction of that company. How can I tell the difference between a supply of staff and a supply of services? If you make supplies of services, e.g. construction services, to another person but your staff continue to operate under your own direction, this is not a supply of staff, but is a supply of those services. This distinction is significant where the services may be zero-rated or exempt, or when determining whether or not the supply is made in the UK. What happens when my department supplies staff to one of its Executive Agencies? If the supplies are made to an Executive Agency that shares your VAT registration - no VAT is due on the supply. This is because the supply is taking place within the same legal entity. If you are supplying staff to an Executive Agency that is separately registered for VAT, you will need to need to consider the guidance set out below. What happens when a GD makes a supply of staff? There are special rules that apply to supplies made by GD. If the supplies could only be obtained by a GD then no VAT is due, whereas if the supplies could be obtained from either a GD or the private sector, VAT will be applicable. These special rules are explained in more detail below. They ensure that where a supply could be obtained from either a GD or from the private sector, both supplies are treated in the same way. This is to recognise that supplies of certain staff between GDs do not distort competition with the private sector. As such, when a department makes a supply of staff to another body it will need to consider whether the supply that is being made could also be obtained from the private sector. Guidance Notes for Government Departments Page 72 of 87

73 How can I tell if a post could be filled from the private sector? You need to consider whether there are specific skills or knowledge which are not available outside the Government sector. Can you provide some examples of specialist posts? Specialist posts are those in which the official has specific qualities/skills, which could not be obtained from the private sector or a job that just doesn t exist in the private sector, and can therefore only be done by a civil servant.. This could include knowledge of specific departmental legislation, bespoke IT systems, procedures or security measures; where this knowledge is not in the public domain. What should I do if the post can only be filled by a Civil Servant? In circumstances where a GD supplies staff for a post that, by virtue of the work undertaken, can only be filled by a civil servant with the relevant specialist knowledge; VAT should not be charged. This is because the GD is the only possible source of the supply. What should I do if the post can be filled by someone from the private sector? In such cases, the VAT must be charged, unless the statement of practice relating to staff applies. (Please see below for more information). Where a taxable supply of staff takes place, VAT is due on the whole value of the consideration for the supply. In addition to any fee charged for the supply, the value of the consideration includes any reimbursement of salary costs, National Insurance and pension contributions. More details on establishing the value of the supply of staff can be found in VAT Notice 700/34 Staff What is the statement of practice? The statement of practice applies if your customer pays the relevant costs directly to the staff and third parties. You may exclude these amounts from the taxable consideration for your supplies of staff provided - Your customer exercises exclusive control over the allocation and performance of the employee s duties during the period of secondment; and Your department does not derive any financial gain from the secondment, whether this comes directly from the secondment or through any other arrangements you may have with the recipient business - for example, from a management services agreement relating to the seconded staff. Guidance Notes for Government Departments Page 73 of 87

74 It is important to remember that the amounts in question may only be disregarded from determining the consideration and value of the secondment when they are paid directly to the individual and/or third parties. If these amounts are received by you, they cannot be so disregarded and will be taken to be part of the consideration and value of the supply. These rules apply whether you supply full-time or part-time staff. They also apply to the value of supplies received from outside the UK under the "reverse charge" procedure Please refer to VAT notice 741A Place of Supply of Services for more information. The Statement of Practice refers to exclusive control, what does this mean? The term exclusive control refers to the extent to which the host organisation has control over the day to day activities of the employee who is being seconded / supplied to it. In other words you will need to consider whether your department when acting as a supplier can impose restrictions on work areas/given tasks during the period that your employee is away on secondment. If your department GD imposes restrictions on the types of work your employee can be asked to do, then this does not meet the criteria for the statement of practice and your supply will be subject to VAT Examples where the host organisation will not have exclusive control over the secondee s day to day duties at their new location could include a situation where a GD stipulates that their employee does not work in specific areas as it could lead to a conflict of interests. This type of restriction is usually imposed to prevent the secondee working in areas where he/she has been privy to privileged information whilst a civil servant. Please note that HMRC always expects that the parent GD would retain ultimate responsibility for the disciplinary matters and right to dismiss their employee. This ensures that Civil Servants remained fully accountable and abide by the accepted codes of conduct for their departments even when they are working in other GDs or outside bodies. Guidance Notes for Government Departments Page 74 of 87

75 Aide Memoire for VAT treatment of Supplies of Staff Stage No. Things which need to be considered VAT Treatment Stage 1 In the first instance, you will need to establish whether your customer is a GD. You can do this by asking your customer for its VAT registration number. GDs have special VAT registration numbers which begin with the sequence followed by two additional numbers If your customer IS a GD please move on to Stage 2 If your customer is NOT a GD, please move on to stage 3 Stage 2 You will then need to consider whether the services provided by the seconded employee could be obtained from the private sector.. a) If the secondee could be obtained only from a GD and not from private practice or the private sector A simple way to establish whether the only source of supply is the GD is to consider how the secondment opportunity was originally advertised. Internal advertisements placed exclusively in departmental newsletters/circulars are an indication that the only possible source of the secondee could be a GD. You must also consider whether the secondment required specific specialist knowledge that could only come from some one inside a GD. Please note that the secondment of general administrators and Directors will NOT fall under these provisions, as they will not be able to satisfy all the necessary criteria set out above The supply is treated as being outside of the scope of VAT. This is because no distortion of competition can arise. Guidance Notes for Government Departments Page 75 of 87

76 Stage 2 b) If the secondee could be appointed from the private sectorthe supply may be subject to VAT. The supply is standard rated unless the concession referred to in Stage 4 applies. Stage 3 If your customer is not a GD. The supply is most likely to be standard rated unless the concession referred to in Stage 4 applies. In exceptional cases the supply may be treated as outside the scope if the only possible source of the secondee is from within government Stage 4 Under the statement of practice, if your customer pays the relevant costs directly to the staff and third parties, the payment is not seen as a consideration for a supply provided that: - the customer exercises exclusive control over the allocation and performance of the employee's duties during the period of the secondment; and - the GD does not derive any financial gain from the secondment, whether this comes directly from the secondment or through any other arrangements which you may have with the customer. More information about this easement can be found in section B of The Appendices to VAT notice 700/34 entitled "Staff". Provided all the conditions set out in Part B of the Appendix to VAT notice 700/34 are satisfied, the reimbursement of salary costs are not seen as being a supply for VAT purposes. The payment is outside the scope of VAT and as such no VAT should be charged. Guidance Notes for Government Departments Page 76 of 87

77 Advice Sheet 3 Section 278 Agreements What are Section 278 Agreements? Section 278 of the Highways Act 1980 allows a Highways Authority (HA) to seek contributions from developers towards the cost of works considered to be for the common good. For example, these works could include the construction of a new slip road or roundabout. I am a HA, what are the VAT implications of section 278 agreements for me? Any work carried out by a HA under a section 278 agreement is a nonbusiness activity for VAT purposes. This is because the HA has a statutory responsibility under the Highways Act 1980, to maintain the road on which the work is carried out. As such, the construction works form part of the HA s statutory responsibilities for maintaining the road. Heading 6 of the Treasury s Contracting-Out Direction prevents GDs from recovering VAT they incur when undertaking works under section 278 agreements. The heading is entitled Alteration, repair and maintenance of road schemes, except (a) any works carried out pursuant to an agreement made under section 278 of the Highways Act 1980 As the HA is not able to claim a refund of the VAT under section 41(3) of the VAT Act 1994, it is a condition of the Section 278 agreement that the contributions they receive include irrecoverable VAT. I am making a contribution to works carried out under section what are the VAT implications for me? The HA cannot issue a VAT invoice to the bodies making contributions because it is seeking a reimbursement of costs and not making a supply. The contributor will be unable to recover any VAT element included in the contribution they pay to the HA. This is because the VAT amount does not relate to a supply, which has been made to you. The contractor carrying out the works will always be making a supply to the HA. Guidance Notes for Government Departments Page 77 of 87

78 Hybrid Road Schemes What are Hybrid Road Schemes? Hybrid Road Schemes are works comprised of new construction together with improvements to the existing road schemes. What are the VAT implications of Hybrid Road schemes? As the hybrid schemes involve two types of work, new construction and alteration, the costs must be separately identified for VAT purposes. This is because some of the VAT incurred on new construction undertaken in the hybrid scheme cannot be recovered. It can sometimes prove very difficult to separate the actual expenditure on new construction from that on alteration etc. HMRC allows an apportionment of costs to be made based on the terms of the additional contract. In cases where it is not possible to directly attribute VAT elements, apportionment may be allowed. Hybrid road schemes are an example of a situation where permission to apportion the VAT has been granted. Guidance Notes for Government Departments Page 78 of 87

79 Advice Sheet 4 Land & Property What do GDs do about leases and MOTO arrangements and what is the difference between them? A lease is a commercial arrangement between a landlord and a tenant under a commercial leasing arrangement. MOTO stands for Memorandum of Terms of Occupation. Many GDs occupy a building under a Memorandum of Terms of Occupation (MOTO). A MOTO is an agreement between two GDs which allows them to share the costs of renting a building or part of a building from a private commercial landlord. Standard Commercial Leases What happens when a GD acts as a landlord? If a GD acts as landlord and supplies a lease to another GD, this is not a MOTO arrangement. The supply made is of leased accommodation and it is exempt. Although the Estate Services Guide issued by the Central Advice Unit of the Property Advisors to the Civil Estate (PACE) should be consulted for more information, H.M. Treasury has advised that GDs must not opt to tax a lease to a tenant, unless there are specific circumstances and these have been approved by HMRC and HMT prior to the option taking place (whether another GD or any other type of body). Information for GDs in England and Wales can be found on page 251 of the 3 rd Edition issued in June GDs in Scotland should consult page 161 Edition 2 issued in February This means the GD as landlord must not charge the tenant VAT and will not be able to recover VAT on goods and services purchased for this exempt supply. The level of the rent may be set to include irrecoverable VAT, but this must not be shown as VAT on the invoice. Your tenant cannot reclaim the irrecoverable VAT included in the invoice as Input Tax. What happens when a GD is a tenant? GDs may occupy buildings rented from commercial landlords or other GDs under the terms of a standard commercial lease. Such leases are exempt from VAT, unless the commercial landlord has opted to tax. GDs cannot recover VAT they incur on the rent of a building occupied for non-business purposes. In addition, a GD cannot recover the VAT on a service charge that is part of the rent. Guidance Notes for Government Departments Page 79 of 87

80 It is also important to remember that VAT incurred on buildings which are leased from commercial landlords cannot be recovered under heading 53 of the Contracting-Out Direction. Opting to tax As stated above GDs are not normally able to opt to tax supplies of land and buildings unless they are selling the property in question and then only with the specific permission of HM Treasury. Any such request should be submitted through your CRM or Customer Co-ordinator. Information on opting to tax is found in VAT Notice 742A Opting to tax land and buildings. Guidance Notes for Government Departments Page 80 of 87

81 PFI - Public Finance Initiatives A PFI company provides GDs with fully serviced and managed accommodation. The most distinct element of PFI arrangements is that risk is transferred from the GD to the PFI provider. When a GD enters into a PFI arrangement for accommodation it will use for its non-business activities, VAT can be recovered under heading 53 of the Treasury s (Contracting Out) Direction. What about recovery of VAT under MOTO Arrangements? Treasury paper PES (99)23 dated 24 September 1999 gives guidance on recovery of VAT on civil estate leases. The GD which has entered into the lease with the commercial landlord is known as the Major Occupier. The GD which agrees to share costs is known as the Minor Occupier Under a MOTO, the major occupier is responsible for all VAT payments and for recovery of VAT. Generally MOTO arrangements fall into three distinct categories. (a) Non-business activities where VAT is recoverable. If a major occupier uses a building for its non-business activities, it can only recover VAT on those contracted-out services detailed in List 2 of the Contracting-Out Direction. If the major occupier is able to recover VAT it should ask the minor occupier for a VAT- exclusive contribution towards costs. (b) Non-Business activities where VAT is not recoverable. If the major occupier is not able to recover VAT, it may ask the Minor Occupier for a VAT-inclusive contribution towards its costs. Under the terms of the MOTO, the major occupier is not making a supply to the minor occupier. So, no VAT invoice should be issued and no VAT should be charged. (c) Business activities. If the major occupier provides a service to the minor occupier that is over and above what is in the MOTO this is a business activity of the major occupier who should charge the minor occupier VAT as appropriate. Guidance Notes for Government Departments Page 81 of 87

82 Aide Memoire Can my department recover the VAT it is charged on rents? If the building is used for Standard-rated business activities Can VAT be recovered? Input tax can be reclaimed under the normal VAT rules Exempt business activities Input tax cannot be recovered Government Non-business activities If a building is occupied under a normal commercial lease granted by a landlord, any VAT charged on the rents and service charges cannot be recovered under section 41(3). Most rents and service charges are exempt from VAT, but the landlord is entitled to opt to tax them at the standard rate of VAT. If you occupy the building under a PFI or similar arrangement - you may claim a refund of VAT under Heading 53 of the Treasury s (Contracting-Out) Direction. More than one type of use. The VAT must be apportioned between the business (taxable and exempt) and non-business uses as mentioned above. Recovery of VAT is determined by how the building is used - see the section on purchases above. Other sources of advice: VAT Notice 742 Land & Property contains more information on general land & property issues. Your CRM or Customer Co-ordinator can provide more information about the VAT Treatment of supplies of accommodation made to GDs. Guidance Notes for Government Departments Page 82 of 87

83 Advice Sheet 5 Money Laundering Regulations Money Laundering responsibilities of GDs The 2003 Money Laundering Regulations extend HMRC s supervision of businesses vulnerable to money launderers, to include High Value Dealers (HVDs). HVDs are businesses that: deal in goods; and accept (or are prepared to accept) cash payment equivalent to 15,000 or more, for any single transaction. HVDs had to implement specific anti-money laundering procedures by 1 March 2004 and register with HMRC by 1 April For more information, please see our website at: GDs are covered by the regulations but the requirement to register depends on whether the activity of accepting large cash payments for goods is by way of business. GDs will therefore need to take their own view, and seek legal advice if necessary, on whether their activities are covered by the 2003 Money Laundering Regulations. The Government Departments Team can provide general advice about the regime. Guidance Notes for Government Departments Page 83 of 87

84 Advice Sheet 6 VAT and Flexible Benefits for Employees (Salary Sacrifice) You will find more information about this in Revenue & Customs Business Briefs 28/11 and 36/11. A letter from the Rt Hon Stephen Timms MP to the Secretaries of State dated 3 November 2009 regarding salary sacrifice is reproduced below. Guidance Notes for Government Departments Page 84 of 87

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