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HMRC internal manual

VAT Government and Public Bodies

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HM Revenue & Customs
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Bodies governed by public law: introduction

The scope of VAT on taxable supplies is defined in section 4 of the VAT Act 1994 as follows:

4(1) VAT shall be chargeable on any supply of goods or services made in the United Kingdom, where it is a taxable supply made by a taxable person in the course or furtherance of any business carried on by him.

A transaction is therefore within the scope of UK VAT if, among other things, it is made by a taxable person. The normal conditions that must apply for somebody to be a taxable person are explained in the Taxable Person manual (VTAXPER) (external users can find the guidance at http://www.hmrc.gov.uk/manuals/vtaxpermanual/Index.htm).

However, Article 13 of the EU Principal VAT Directive (previously Article 4(5) of the EC 6th VAT Directive - 77/388/EEC) applies to bodies governed by public law as follows:

13(1) States, regional and local government authorities and other bodies governed by public law shall not be regarded as taxable persons in respect of the activities or transactions in which they engage as public authorities, even where they collect dues, fees, contributions or payments in connection with those activities or transactions.

However, where they engage in such activities or transactions, they shall be regarded as taxable persons in respect of those activities or transactions where there treatment as non taxable persons would lead to significant distortion of competition.

In any event , bodies governed by public law shall be regarded as taxable persons in respect of the activities listed in Annex 1 provided that theses activities are not carried out on such a small scale as to be negligible,

(2)Member states may regard activities , exempt under Articles 132, 135, 136, 371, 374, to 377 and Article 378(2), Article379(2), or Articles 380 to 390 engaged in by bodies governed by public law as activities in which those bodies engage as public authorities.

The consequence of Article 13(1) is that government and public bodies are not treated as taxable persons when they engage in certain activities or transactions and these activities or transactions are outside the scope of VAT, unless this would significantly distort competition. By ‘taxable person’ the EU legislation means a person who, independently, carries out an economic activity whatever the purpose or result of that activity.

This reflected in section 41A of the VAT Act 1994 Supply of goods and services by public bodies:

(1) This section applies where goods or services are supplied by a body mentioned in Article 13(1) of the VAT Directive (status of public bodies as taxable persons) in the course of activities or transactions in which it is engaged as a public authority.

(2) If the supply is in respect of an activity listed in Annex I to the VAT Directive (activities in respect of which public bodies are to be taxable persons), it is to be treated for the purposes of this Act as a supply in the course or furtherance of a business unless it is on such a small scale as to be negligible.

(3) If the supply is not in respect of such an activity, it is to be treated for the purposes of this Act as a supply in the course or furtherance of a business if (and only if) not charging VAT on the supply would lead to a significant distortion of competition.

(4) In this section “the VAT Directive” means Council Directive 2006/112/EC on the common system of value added tax.”

For ease this guidance refers to Article 13(1).

Article 13(2) is an optional measure which is not implemented in the UK.