VATGPB5600 - NHS capital building projects: frameworks
This is HMRC's only guidance for the NHS Capital Building Projects Frameworks
Background
This is the only guidance that should be relied upon for the named schemes. This guidance does not represent a change in policy or operation.
Since 2002, HMRC has administered an ‘easement’ with the NHS sector in relation to the recovery of Contracted Out Services (COS) VAT for specific building schemes.
The easement allows for an estimation of recoverable COS VAT in respect of the relevant scheme, followed by an adjustment to ensure the correct amount of COS VAT is recoverable once the amount is known.
The purpose of this guidance is to inform NHS Bodies of the established process and HMRC requirements in applying for COS VAT recovery.
The specific building schemes are those procured under the following frameworks:
- ProCure23 Framework (P23)
- Framework Scotland 3
- NHS Building for Wales 2
This guidance also includes previous iterations of the Frameworks listed above – while the requirements of each Framework may differ, the principles underpinning COS VAT recovery have remained the same.
Any future iterations of the Frameworks must be referred to HMRC for advice/agreement on COS VAT recovery.
For ease HMRC refers to ‘Framework’ throughout this guidance to cover all frameworks/schemes and uses the phrase ‘target price’ to cover the agreed price of the work being undertaken.
Foreword
Legal Position
The legal basis for COS VAT recovery can be found in Section 41(3) VAT Act 1994.
Section 41(3) VATA allows the Commissioners to refund VAT incurred by Section 41 bodies where it is incurred for purposes other than the furtherance of business activity. Any claim must be made in such time, form and manner as the Commissioners may determine.
General Points
Under the terms of the easements, HMRC accepts that NHS bodies can recover an amount of COS VAT incurred, subject to COS VAT time limits and upon meeting the criteria of COS guidance, through an application to HMRC.
While there are specific requirements for using this easement, the basic principles are that services must still be considered in line with current COS guidance and meet the necessary criteria. The main COS headings applicable to this easement are COS Headings 35, 37 and 52. VAT Government and Public Bodies Contracted out Services (COS) Headings.
Please note that where claims are apportioned according to business/non-business use, the normal VAT input tax rules apply.
The agreed structure of the Framework allows VAT recovery on projects in which the NHS body contracts with a Principal Supply Chain Partner (PSCP), who then sub-contracts services with external contractors to complete the project. In effect there is separation of services of planning and design from the PSCP and construction.
Where all planning/design/construction services are carried out ‘in house’, this structure does not meet the grounds on which VAT recovery has been agreed. The PSCP’s role is to ensure that the project is constructed in line with the agreed target price and the NHS body’s requirements. As such, they act in the role of an administrator for the project, with named persons being appointed by the PSCP as fulfilling this role.
These persons are not involved in the actual construction process and as such, their costs are regarded as being “Professional Fees”. HMRC agrees that the VAT charged in respect of these fees can be recovered by NHS Bodies, subject to meeting the usual criteria outlined in the Heading 52 guidance.
Some of the costs incurred by the PSCP that can be recovered as professional services under COS Heading 52 include:
- PSCP Overhead and Profit charges
- PSCP Costs for professional services (those recoverable under COS H52)
- Gain share
COS VAT Recovery – Process
Summary
To make a valid claim under the easement, NHS bodies must follow the established process set out in this guidance:
- Intending Claim - notification to HMRC of schemes where VAT incurred crosses a COS VAT year
- Initial Claim - an estimated COS VAT recovery percentage
- Initial Claim revision – a revised estimated COS VAT recovery percentage (where necessary)
- Final Claim - a final COS VAT recovery percentage
- Final Adjustment - an adjustment of COS VAT recovered across the lifetime of the scheme
All relevant documents are held in the accompanying annexes to this guidance.
COS VAT Recovery Calculation
Where a project is procured under the Frameworks mentioned above, NHS bodies can determine the correct VAT recovery in two ways:
the banding scheme, or
a line-by-line calculation
The format of the calculation (banding or line-by-line) must be the same for the initial and final submission.
The only exception is when a banded claim has been submitted at initial stage, but where final project costs exceed £15m gross; in this instance a line-by-line calculation must be submitted at final stage.
Banding Scheme
The banding scheme was introduced to help simplify the calculation process for NHS bodies. It provides categories of building work and a corresponding VAT recovery percentage – further details are held in COS Heading 35 guidance.
- The NHS body should firstly separate costs relating to professional services and building work.
- Please note: within building work, items such as site administration, site facilities, preliminaries, risk allowances, and contingencies should be separated out. They will be included in the calculation, but no VAT recovery will be assigned to them.
- Secondly, they should determine what type of project is being undertaken and apply the appropriate banded percentage to the building work costs only.
- Finally, any professional services can be claimed as fully recoverable under COS H52 (subject to meeting the criteria outlined in the H52 guidance).
The rules around using the banding scheme are the same as those outlined in COS H35 guidance:
- They apply only to actual construction works (not including preliminaries).
- They apply to a total cost of up to £15m gross.
Line by Line Calculation
A line-by-line calculation involves using bill of quantities to provide a more detailed breakdown of the work being undertaken.
You must consider all costs and determine which works are eligible for VAT recovery in line with the guidance for the relevant COS Heading e.g. H35 guidance for maintenance and repair, and H52 for professional services.
Apportionment within a calculation
Whether using a banding or line by line calculation, where work is carried out for different areas or both business and non-business use, a fair and reasonable apportionment method must be applied to calculations.
Floor area calculations are generally not an acceptable apportionment method, unless the area on which work is being carried out is of the exact same specification. In your submission to HMRC you should set out the reasons for suggesting a floor space method if appropriate.
Example: Work is being carried out on different areas, such as a hospital ward and a storage facility. A floor area calculation will not be acceptable in this case, and the calculation must be based upon apportionment of costs.
Calculations must be to 2 decimal places.
Intending claims
Usually, the first notification of a claim to HMRC is an initial claim (at the time when the target price for the scheme is agreed).
However, there are instances where VAT is incurred before an initial claim can be submitted. This tends to happen where work commences on the pre-construction stages of the project in the financial year prior to that in which the target price is agreed.
HMRC allows ‘intending claims’ to be submitted to address this situation – this allows VAT incurred in a previous COS year to be claimed at the approved percentage, even though it is ‘out of time’ according to COS time limits.
You must register the intending claim with HMRC before the COS VAT year adjustment period i.e. 31 July, in which VAT is being incurred.
Where an intending claim is notified to HMRC by 31 July, HMRC will consider a project as properly notified. This means that VAT on costs incurred in the previous financial year will be ‘in time’ for COS purposes, and COS VAT can be reclaimed (subject to meeting COS Heading criteria) as part of the initial claim approval process.
Where an intending claim is not notified to HMRC, VAT incurred may be blocked for periods prior to 1 April of the previous year.
For an intending claim, use the template at Annex 1 and send it to: nhs.pbg@hmrc.gov.uk
Where an adviser is working on more than one project or for multiple clients, HMRC will accept notification in spread sheet format, but the same information must be supplied for all projects being notified.
Where there is ongoing delay in the agreement of the target price for a scheme and there is a valid reason for the delay (e.g. political, funding availability, business case approval, ecological) and the delay continues into further COS year(s), you must continue to notify the ongoing intending claim to HMRC by 31 July each year.
HMRC will provide a five-digit HMRC reference number. This number is unique to that project and should be used for all future correspondence about the claim. This will ensure all claims link up to the originating submissions.
As a matter of best practice, an intending claim will be allowed for a maximum of 2 financial years before an initial claim is expected. Where there are exceptional circumstances, such as ongoing funding issues, HMRC will consider these schemes on a case-by-case basis.
Initial claims
The initial claim is based on an estimated distribution of costs. The resulting VAT recovery percentage is an estimation which must be corrected once the final amount of recoverable VAT is known – see ‘Final Claim’.
The initial claim must be approved by HMRC before any VAT incurred from the PSCP can be recovered. Following the issue of a written approval letter by HMRC, VAT can be claimed (subject to meeting COS VAT time limits).
Where VAT is recovered prior to approval by HMRC, an error will have occurred. HMRC will issue an assessment, which will include interest and potentially a penalty.
See ‘Initial Claim - COS VAT already reclaimed’.
Submitting a claim
The initial claim must be submitted to HMRC by 31 July following the end of the COS year in which target price is agreed. If this deadline is not met, invoices will go out of time for the purposes of reclaiming COS VAT. Where an initial claim is submitted late, HMRC will ‘block’ VAT recovery on those invoices that are out of time.
This submission must include all documents listed in Annex 2.
An intending claim (see above under ‘Intending Claims’) may also have been registered with HMRC where COS VAT recovery time limits apply, but an initial claim is always expected by the 31 July of the year in which the target price is agreed. Any later submissions will not be eligible for COS VAT recovery.
Points to consider
As this initial calculation is an estimation, items such as site administration, site facilities, preliminaries, risk allowances, contingencies should be included in the calculation, but no VAT recovery will be assigned to them.
For an initial claim, use the templates at Annex 2 and send it to: nhs.pbg@hmrc.gov.uk
Once the initial claim has been reviewed and approved by HMRC, the NHS Body will receive a letter confirming the estimated COS VAT recovery percentage to apply to all PSCP invoices received to date and those to be received until the project is completed:
- PSCP invoices received to date:
COS VAT recovery must be made in the VAT return following receipt of the initial approval letter. Failure to claim COS VAT at that point may render any reclaims out of time.
- PSCP invoices received until the project is completed:
The same process applies to invoices received throughout the lifetime of the scheme up to final stage – COS VAT must continue to be reclaimed at the estimated initial percentage in the current VAT return or by the June VAT return of the current COS year. Failure to claim COS VAT within these time limits may render any reclaims out of time.
HMRC Activity
Where HMRC is unable to approve a claim and requires more information, this needs to be supplied within a 30-day period. Although a reminder will be issued, continued failure to provide the requested information will result in a claim being rejected with no VAT to be claimed.
HMRC will provide a five digit HMRC reference number (if one has not already been assigned to an intending claim). This number should be used for all future correspondence about the claim.
HMRC will send a letter with the approved VAT recovery percentage to the NHS body directly.
Each year, as part of internal maintenance activity, HMRC will review the expected date of completion of schemes and ask you to submit a final claim where that date has expired.
Initial Claim - COS VAT already reclaimed
One of the rules supporting the easement is that COS VAT must not be reclaimed prior to HMRC approval of the initial VAT recovery percentage.
Where the initial claim shows that COS VAT has already been reclaimed, HMRC will consider an error to have been made, and issue an assessment under S73 VATA 1994, which will also include interest and potentially a penalty. See section ‘Final Claim - Assessments of COS VAT’
Initial Claim – revision
HMRC accepts that there are occasions where an unexpected event may materially change the costs/scope of works and impact the estimated COS VAT recovery percentage, for example early warnings/compensation events.
In those cases, you must submit a revised initial claim and receive a revised estimated VAT recovery percentage to be applied from that point.
Specifically, where it becomes known that the lifetime of the project is expected to last more than 3 years, you must review costs and submit a revised initial claim at 3 yearly intervals.
Submitting a claim
The revised initial claim must be submitted to HMRC at the point that costs are added to the target price, or the scheme continues to operate over 3-year intervals. Not taking this action will result in an incorrect VAT recovery percentage being applied and where this is an overclaim of VAT, an assessment will be issued.
This submission must include all documents listed in Annex 2.
Final claims
The final claim is based on the actual distribution of costs.
The resulting VAT recovery percentage is the correct one, rather than an estimation (as provided in the initial claim).
The final claim allows for the estimated COS VAT already claimed to be corrected via an adjustment.
Submitting a claim
Final claims must be submitted to HMRC:
A maximum of 6 months following receipt of the final invoice; and
In line with the relevant final COS year.
Any final claims submitted outside of the relevant final COS year may be out of time for VAT recovery purposes.
Where a final claim cannot be submitted in line with the above direction, any delays must be notified to HMRC with a full explanation for the delay provided. HMRC will consider the reasons for the delay and notify whether the resulting VAT recovery position is impacted.
For a final claim, use the templates at Annex 3 and send it to: nhs.pbg@hmrc.gov.uk
The final claim must include:
- The HMRC reference number (to link to the initial claim)
- All the templates at Annex 3.
- Full schedule showing invoices received, VAT incurred, VAT amount claimed and associated journals
- Calculation – as this is the final claim, parts such as site administration, site facilities, preliminaries, risk allowances, contingencies should be included in the calculation and where applicable VAT recovery assigned to them.
- Compensation events – if CE’s are included within the final claim, then full details must be submitted
HMRC Activity
HMRC will send a letter with the approved final VAT recovery percentage to the NHS body directly and copy in any agents who are supporting the claim.
The letter will let you know what the expected adjustments need to be – this will be the difference between the initial percentage and the final percentage and may be a debit or credit.
Final Claim - COS VAT Adjustment
Once the final claim has been reviewed and approved by HMRC, the NHS Body will receive a letter confirming the actual VAT recovery percentage to apply to all PSCP invoices across the lifetime of the scheme. An adjustment of VAT already claimed must take place on the next VAT return.
The deadline for submitting the VAT return online is usually one calendar month and 7 days after the end of an accounting period. Evidence of the adjustment must be sent to HMRC by the 8 day.
Where an NHS body does not provide evidence of the adjustment being made, HMRC will make contact to obtain confirmation/evidence.
HMRC accepts that the adjustment of COS VAT recovered at the final claim stage is not being made in respect of an error in previously submitted VAT returns. The adjustment must be made on the current VAT return once the correct information is known.
However, where the adjustment is not made as required, then HMRC considers an error to have been made and an assessment under S73 VATA 1994 may be issued, which may also include interest and a penalty. See section ‘Assessments of COS VAT’
Assessments of COS VAT
Assessments for COS VAT will be made as necessary to ensure the correct amount of VAT is refunded. An assessment will be made in respect of the prescribed accounting period in which the repayment of COS VAT was paid.
Value Added Tax Act 1994 Section 73
Other Scenarios
Minor Works Schemes (Programmes of Projects)
NHS Bodies are required by HMRC to provide confirmation that any Minor Works Projects that are undertaken either individually or as part of a larger programme of minor works all have separate target prices and that an NHS Body can account for the costs associated with them separately.
To achieve this, HMRC requires that an NHS Body provides separate copies of PSCP invoices and evidence that the NHS Body has set up valuation accounts for the costs identified on the invoices.
Minor Works (tasks in year)
Where a programme of annual minor works takes place, HMRC expects one overarching initial claim for all planned tasks and one overarching final claim for completed tasks.
This will result in one estimated VAT recovery percentage (initial claim) and one final VAT recovery percentage (final claim) that can be applied to all invoices under the minor works scheme.
Any tasks not completed will roll over into the following year’s minor works programme and form part of the claim for that year.
‘One and only’ claims
Where the target price is agreed and work is started and completed ‘in year’ (i.e. does not cross into the next financial year), HMRC will accept a ‘one and only’ claim.
This should be submitted as a final claim at the end of the project and clearly labelled as such.
Any VAT incurred will not be recoverable until the final percentage is approved by HMRC, and a letter of approval is issued.
VAT claims for projects that are aborted.
Where projects are aborted and will not recommence at a later point, HMRC will consider claims for VAT recovery in relation to Professional Services only.
These claims need to be clearly marked for HMRC’s attention and confirmation provided by the NHS Body that the project is abandoned.
Any claim made should follow the format for a ‘one and only’ claim. There will be no initial and final submission - only one submission covering all costs incurred.
Additional Notes
NHS Newsletters
You should not rely on reference to capital projects within historical NHS Newsletters, all relevant points are in COS guidance.
VAT Zero-rated projects
Some capital projects may have a zero-rated aspect to the build. In these instances, HMRC can only process the claim once the zero-rating has been confirmed.
If a project has started to incur costs within a COS year, but zero-rating has not been confirmed, then the NHS body must notify HMRC via an intending claim, to ensure any incurred VAT which may be recoverable, is protected.
As with all intending claims, there must be an annual notification, until the initial claim is submitted with its zero-rating status.
Capital Goods Scheme
NHS Bodies must consider business use within any Initial or Final calculations submitted to HMRC and should separately consider whether any adjustments should be made under the Capital Goods Scheme. Any Capital Goods Scheme adjustments sit ourside this framework and are to be made in accordance with Notice 706/2
Further Notes
PSCP Fee Percentage
The percentage charged by the PSCP includes the overhead and profit costs which the PSCP has incurred as part of a project.
Gain Share
If when undertaking their duties in accordance with the previous paragraph ‘PSCP Fee Percentage’, the PSCP achieves a saving on the agreed cost, then the savings identified are regarded as being the “Gain Share” which both parties benefit from.
The saving is usually apportioned on an equal basis (unless otherwise agreed and identified in the contract) between the appointed PSCP and the Trust. This saving is down to ’Good Administration’ by the PSCP and as such is to be regarded as a “Professional Fee” with any VAT being charged on the sums being recoverable by the NHS Body.
Site Administration and Site Facilities (Preliminaries) and Risk Allowances (which covers the area of contingencies, early warnings etc)
No allowance will be made in respect of VAT at the initial VAT claim in respect of these cost areas.
At the Final claim stage there may be costs associated with these cost areas based on “defined costs” and may result in the recovery of additional VAT by an NHS Body.