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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 wider government/ NHS specifications.

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 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. What is important is that the department or NHS trust is procuring an IT system designed to its specifications (or to wider government or NHS specifications). 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.

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. The only exception is telephony, which is always excluded.


  • 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.
  • Software support which forms part of a fully managed and serviced computer infrastructure.
  • 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.


  • The supply and support of off-the-shelf software.
  • Licence fees except where integral to the provision of bespoke software or a fully managed and serviced computer infrastructure.
  • The hire, installation or purchase of hardware alone.
  • Line rental as a separate supply unless as part of a fully managed and serviced computer infrastructure.
  • Telephony, which includes Voice Over Internet Protocol (VOIP).
  • Hire of computer consultants to add expertise to in-house IT teams.
  • Web design where purchased as a stand-alone supply – this may be eligible for recovery under Heading 49.

Definitions and interpretative notes

1. ‘Fully managed and serviced computer infrastructure’

‘Fully’ is not to be read restrictively or taken to mean singular. A single IT initiative may be formed with reference to many ‘mini’ IT initiatives that make up the whole.  Focus instead on the term “managed and serviced infrastructure”.

‘Stand-alone’ contracts should be judged on their own merits. Variations to existing IT initiatives may be considered to be part of an overall IT initiative.

The ‘fully managed and serviced’ test will be satisfied where the recipient receives a package of services which are supplied and controlled by the supplier and where the risk of running the system and operating the service largely rests with the supplier.

2. ‘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.

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.

With any pre-existing software package, the key to qualification for VAT refund will be to consider whether the software package has been substantially modified.

Additional Information

Composite supplies and multiple suppliers

VAT refunds under this heading are permitted where the recipient contracts with more than one supplier, provided the services across the relevant supplier contracts dovetail together to provide a fully managed and serviced IT infrastructure. An example of this would be smaller contracts which when bundled together build up to one overall tower of fully managed and serviced IT infrastructure, this would also include any costs in relation to the build and support of the bespoke software which dovetails into the contract.

VAT on qualifying services received as part of 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 a fully managed IT infrastructure service which includes telephony; in these situations HM Treasury 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 supplied as an integral part of qualifying services, are included in the contract for the qualifying services, and are ancillary to the qualifying services supplied.