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HMRC internal manual

VAT Government and Public Bodies

Government departments and health authorities: Contracted Out Services (COS) Headings: COS Heading 14 - Computer services supplied to the specification of the recipient

This heading applies to services supplied to a government department or NHS body in its procurement of an IT system to its own specifications or to specifications dictated by the government or NHS.

The origins of this heading lie in the outsourcing of entire IT systems by central government to the private sector. For this reason, the heading does not cover in isolation the procurement of off-the-shelf software or web design.

Because of the fast pace of technology, this heading is not intended to be restricted to past practices, but instead to include modern methods of supplying an entire IT system. This may not now involve using a single outsourced provider, or outsourcing all aspects of the IT system. What is important is that the department or NHS trust requires an IT system designed to its specifications (or to specifications dictated by the government or the NHS) and this is mainly provided through outsourcing. Whether ownership of the hardware is or is not in the public sector, whether there is one supplier or several suppliers, whether the servers are or are not remote, does not affect this basic position.

When we say “to the specification of the recipient” we mean that the system/software should not be simply designed and built in order to meet certain perceived needs. The specifications must have either been specifically dictated to the supplier, or be of such specific requirements that it would have no application outside of the Government or NHS. For instance, if a system can be used by private healthcare providers, it would not meet the rule and recovery would not be possible. For that reason, many of the patient records systems that are being supplied are unlikely to be recoverable.

Provided that the supply received is an IT system designed to the users specifications, this heading applies even though some components of the package would – if supplied in isolation – be excluded from the heading. Thus, for example, where a department or NHS trust requires such an IT system and outsources its provision to several contractors, possibly retaining the project management in-house, in this situation the contracts and in-house project management are components of the procurement of the IT system. The only exception is telephony, which is always excluded.

The following examples of what is included and what is excluded from heading 14 should be read in conjunction with the definitions, interpretative notes and additional information at the end of this guidance.

Includes

  • The provision by one or more suppliers of an IT system either using the recipients’ own hardware or hardware provided by a supplier of qualifying services that form a part of the infrastructure. At one time the requirement was for the system to be fully managed by the outsourced provider, but now it is accepted that the management function can be retained in-house (or, in the case of existing contracts, returned in-house)
  • Software support which forms part of an IT system package
  • The development, implementation and support of bespoke software
  • Hosting Computing Services, Archiving Communication Services, Data Communications Services, Desktop Communications Services, for example Picture Archiving Services (PACS), Ethernet cable/Data lines and Cloud computing when supplied as part of an IT system
  • Computer consultants and other professionals where they are under the control and management of an outsourced provider and form a part of the overall procurement of an IT system designed to the department’s or trust’s specifications.
  • License fees (including those delivered electronically, or delivered in a package containing a voucher or code to be redeemed electronically):
    • supplied as an integral part of an IT system, whether for bespoke or off-the-shelf software;
    • for bespoke software

The Tax Centre of Excellence (TCoE) has published a joint TCoE, HMRC and HMT “Agreed Principles – IT Licences” document at http://taxcentreofexcellence.uk/, which provides examples and clarification.

Excludes

  • The supply, license and/or support of off-the-shelf software
  • The hire, installation or purchase of hardware alone
  • Line rental as a separate supply
  • Telephony, which includes Voice Over Internet Protocol (VOIP) and videoconferencing
  • Blackberry mobile phones, which are a telephony service
  • Hire of computer consultants to add expertise to in-house IT teams and controlled or managed by those teams. This is a supply of staff rather than of IT services.
  • Web design where purchased as a stand-alone supply – this may be eligible for recovery under Heading 49

Definitions and interpretative notes

‘An IT system’

An IT system itself can be made up of several packages which could be provided by different suppliers, however as long as the packages, when linked together form an entire IT system that has been built to the recipient’s specifications, this would still qualify for recovery under this Heading.

HM Treasury’s view is that an ‘IT system’ could be a stand-alone system or equally the system may form part of a larger IT system to be linked with the department’s or NHS body’s overall IT network.

Therefore, VAT refunds under this heading are permitted where the recipient contracts with more than one supplier, provided the services across the contracts join together to provide an IT system.  An example of this would be smaller contracts which, when joined together, form a tower IT system.  This would also include any costs in relation to the build and support of the bespoke software which is provided as part of the contract.

VAT on qualifying services received as part of a wider supply that includes non-qualifying services or goods, for a single all-inclusive charge, is not eligible for refund unless the qualifying services are supplied under a separately ordered, negotiated and contracted agreement. The exception to this is where a government department or NHS body receives an IT system which includes telephony; in this instance, HM Treasury (HMT) require the VAT incurred on the contract to be apportioned between telephony and IT services. The VAT which relates to the IT services can be recovered under Heading 14 whilst any VAT incurred on telephony services cannot be recovered.

A VAT refund is permitted where goods are received as an integral part of a supply of qualifying services, are included in the contract for the qualifying services, and are ancillary to the qualifying services supplied.

*‘Bespoke software’ *

Bespoke software includes the creation of a new software package. This includes research and development, design and consultancy services. It may also include aftercare services such as updates and helpdesk facilities.

It also includes the substantial modification of a pre-existing package of software to meet the needs of the recipient. In such circumstances, the key to qualification for a VAT refund will be to consider the extent of the modification. Substantial modification would require changes that effectively create a product that is unrecognisable from the original. ‘Customisation’ or ‘personalisation’ of pre-existing packages are unlikely to be substantial modifications – they tend to be data management/input issues rather than actual remodelling of the software.

Non-qualifying ‘off the shelf’ software is taken to mean stock software such as “Microsoft Office” packages, Sage accounting software, etc. These generally require minor modification during implementation and would not be eligible for recovery under Heading 14 unless supplied as a minor part of an entire IT system.

*‘Staff’ *

Where the supplier of IT services also provides staff, and that staff remain under the direction and control of the supplier, the staff are treated as part of the provision of IT services, and costs will be recoverable under this Heading.

In modern contracting situations there are a number of scenarios that can occur. Treasury have therefore considered that the following four situations are likely to occur:

  • Where IT services and staff are provided by one supplier, and the staff are under the day to day control of the government department/NHS, this is a supply of staff and VAT is irrecoverable.
  • Where IT services and staff are provided by one supplier, the staff are under the day to day control of the supplier, and the activities delivered meet the COS14 criteria, the VAT can be recovered.
  • Where the government department/NHS procure an IT infrastructure from one supplier and IT service staff from another supplier, and those staff are under the day to day control of one of the suppliers, the VAT incurred on the supply of staff can be recovered in line with the guidance at ‘An IT system’ above.
  • Where the government department/NHS procure an IT infrastructure from one supplier and IT service staff from another supplier, and the government department/NHS has the day to day control of those personnel, this is still a supply of staff and any VAT incurred is irrecoverable.

The important point to note, therefore, is that recovery is only possible where the staff are not under the control of the government department or NHS body. If they are under the control of any other party, and the supply is an integral part of the overall infrastructure provision, recovery is possible.

‘Day to day control’: The TCoE has published a joint TCoE, HMRC and HMT “Agreed Principles, guidance and FAQs – COS14 Resource & Digital Expertise” document at http://taxcentreofexcellence.uk/, which provides examples and clarification.