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HMRC internal manual

VAT Government and Public Bodies

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HM Revenue & Customs
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Local government partnership programmes: structure and VAT recovery

Introduction

Although there are many initiatives there are a limited number of structures. Partnership programmes are usually grant funded by a central government department. Generally these grants fall outside the scope of VAT, although on rare occasions supplies can arise if goods or services are supplied for a consideration.

The effect of the grant funding on the ability of the partnership to recover VAT will depend on how the partnership is structured and whether it makes any taxable supplies. The structure is determined by the parties involved. In essence there are three principal structures for partnerships involving local authorities.

Lead body partnership

The partners may establish a single legal entity to deliver the programme. One of the partners is assigned lead responsibility for delivering the partnership’s activities, often referred to as a ‘lead body partnership’

Each partner retains responsibility for delivering those aspects of the partnership appropriate to it, even though this is to a common objective agreed by the partners (often via a partnership management board or committee) and subject to funding distributed by one of the partners acting as accountable body.

Where the partners establish a single legal entity to deliver the partnership programme it does not inherit any special VAT status (unless it is set up as an ‘arms length company’ as defined in the Local Government and Housing Act 1989 as below). It is subject to normal rules, in particular for recovery of VAT incurred which is determined under sections 25 and 26 of the VAT Act 1994. The legal entity does not inherit local authority section 33 entitlement to VAT recovery. It is therefore unlikely that it will be able to recover any VAT incurred in delivering the programme unless there are business activities for VAT purposes.

Arms length company

In the case of an ‘arms length company’ under the Local Government and Housing Act 1989, this normally falls within the local authority’s VAT registration. However, Department of Communities and Local Government guidance bars a housing arms length management organisation from being an arms length company of this kind and so it is a separate legal entity.

If the partners establish a registered charity to deliver the programme, certain supplies it receives can be zero rated under Groups 5, 6 and 15 of Schedule 8 to the VAT Act 1994.

Where one of the partners is assigned lead responsibility for delivering the partnership’s activities, that is to say is appointed as the partnership’s ‘lead body’, that partner:

  • receives any funding for the project which then belongs to it; and
  • purchases the goods or services on which the VAT is incurred in delivering the programme.

Where the lead body partner is a local authority any VAT incurred in delivering the partnership can be recovered under section 33 (see VATGPB4000).

Management board or committee

Where a management board or committee is established to deliver the programme, within which the organisations or individuals come together as an unincorporated body but without economic ties, each partner retains responsibility for delivering those aspects of the partnership appropriate to it. As such that partner’s VAT status will determine whether VAT incurred is recoverable. Typically some of the VAT incurred may be recoverable by those partners eligible for section 33 status (see VATGPB6300).