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HMRC internal manual

VAT Government and Public Bodies

HM Revenue & Customs
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Government departments and health authorities: Contracted Out Services (COS) Headings: COS Heading 35 - Maintenance, non-structural repair and cleaning of buildings

The key to this heading is that it does not cover structural work such as the alteration of a building or the construction of an extension. The building can either be held under a freehold or a leasehold interest, but the heading does not include the service charges which are included in the lease as these are normally regarded as additional rent, and therefore further consideration for the occupation of the building.

Although in principle a ‘line by line’ calculation for each item of work is acceptable, some easements have been agreed for government departments and NHS bodies – see below:

Recovery of VAT on a line by line basis

Go through Bill of Quantity/Tender documents etc. and decide what is fully-recoverable, non-recoverable and Pot (mixed - unable to separate).

With Preliminaries – if you have a detailed breakdown and can separately identify qualifying items (professional services, security, and so on), these can be added to fully-recoverable figure, with the rest in non-recoverable, or the whole figure can be added to Pot (mixed).  This is an either/or, what you cannot do is strip out fully recoverable and add rest to Pot.

If a piece of work can be easily differentiated between fully/non-recovery - for example, “Supply and fit 20 doors (16 replacement / 4 new)”, 80% of price can be added to fully-recoverable and 20% to non-recoverable.  If the description just says “Supply and fit 20 doors”, this would be added to the Pot.

When this is completed, the formula to find out the provisional percentage recovery on all interim payment invoices is:
Fully-recoverable ÷ (Fully-recoverable + Non-recoverable) = Percentage

Headings such as Provisionals, Overheads and Profit, Contractors margin, and so on. should be placed in the Pot; Contingencies should be ignored until the end of the project, when it will become clear if any have been spent. Capital projects should be reviewed annually or at the end of the project whichever is sooner.  Where work is carried out to meet H&S or fire regulations, this does not mean you can just claim back everything.  The work must still be listed on repairs and maintenance list to qualify for recovery.

Easements for government departments

In the case of government departments, it is acceptable to refer to government accounting principles to determine whether work is or is not structural. Work funded from running costs (revenue spending) is accepted as non-structural and therefore within the scope of this heading, whereas work funded from capital expenditure is not.

Easements for NHS bodies

Construction projects below £5000

HMRC have agreed with the Department of Health that construction works costing under £5000 (excluding VAT) may be treated, as repairs and maintenance and the VAT element are refundable under the Contracted-Out provisions.

The Department of Health Circular EL (90) P64 defines such work as “individual works schemes for the initial provision, extension improvement or adaptation (including upgrading), renewal, replacement or demolition of buildings, building elements (e.g. roofs), external works, engineering services or plant”.

Each project, however, must be complete and self-contained.  A large project cannot be split into individual elements to bring the cost down, per element, to below £5000.  It will only apply where the project is undertaken in its own right and not as part of a larger project.

Capital Building Projects

By Capital building projects, we mean those projects that involve building and construction works which will normally take weeks/months or even years to complete. These projects will often include costs for works that are either eligible or ineligible for VAT recovery.

Capital building projects are dealt with under the COS rules; however, VAT is only recoverable on the repair & maintenance costs not replacement.  On projects where there are alterations, extension, modification there would be little scope for recovery as this ceases to be repair and maintenance.

On new builds, only professional services may be recovered where the supply is outside of the main contract and is to the NHS body direct.

For example, where you are having an extension built, and you are knocking through from an existing building, there would be little scope to recover VAT on making good damaged walls/plaster as this would be considered disturbance works. However, if you were taking advantage of repairing e.g. wires, plumbing on the existing building at the same time, this would be recoverable.

How to calculate VAT recovery

NHS bodies can determine the correct VAT recovery on capital building projects in two ways.  They can either go through the relevant documents in their possession such as bills of quantity/ schedules of work etc. on a ‘line by line basis’ determining which works are eligible for VAT recovery and then recover these costs subject to the normal VAT rules or NHS bodies can use the ‘banding scheme’ which involves simply determining what type of project is being undertaken and recovering that % applicable to the project invoices/ interim certificates see below.

Recovery of VAT using the ‘banding scheme’

To reduce the burden of the tax further, NHS bodies have the option to determine simply the element of VAT recoverable on contracted out services on those capital-building projects of a total cost of up to £15,000,000.  Having decided the type of project involved from the following list, the recovery rate shown is applied to the invoiced VAT incurred on the project for inclusion on the monthly VAT 100 and accompanying VAT21.


New build Complete new construction from scratch or making use of the foundations of an existing building, where the whole of the former building has been demolished to ground level. 0%
Extensions Where a building is enlarged or extended and that enlargement or extension creates new space. 5%
Major Alterations Works to an existing building where major work has taken place to the fabric of the original building including the replacing of much of the internal/external configuration. 20%
Minor Alterations Work to an existing building where the alterations are incidental to and have occurred because of repair/maintenance work. 40%
Refurbishment / Repair and maintenance This is general upkeep to and refurbishment of existing buildings where the works do not result in any alteration or additions. 75%

These bandings apply only to actual construction works. Subject to the normal rules, NHS bodies may continue to recover VAT incurred on supplies received directly of professional services (for example, architects).

Additional information

Examples of what is included or excluded under Heading 35 can be found at VATGPB10435.