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HMRC internal manual

VAT Government and Public Bodies

HM Revenue & Customs
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Government departments and health authorities: VAT law: VAT recovery on non-business activities

VAT incurred in the course of non-business activities is not generally recoverable. However, there are special provisions which apply to Government Departments and health authorities that enable them to recover VAT incurred on certain of their non-business activities. These are set out in section 41(3) of the VAT Act 1994 as follows:

‘Where VAT is chargeable on the supply of goods or services … on the acquisition … or on the importation of any goods by a Government Department … and the supply, acquisition or importation is not for the purpose-

(a) of any business carried on by the department, or

(b) of a supply by the department which, by virtue of a direction under subsection (2) above, is treated as a supply in the course or furtherance of a business,

then, if and to the extent that the Treasury so direct … the Commissioners shall … refund to it the amount of the VAT so chargeable.’

The phrase ‘to the extent that the Treasury so direct’ has particular significance as it means that Government Departments and health authorities, unlike section 33(3) bodies (see VATGPB4000), are not able to recover VAT on all of their non-business activities.

This is restricted by the Treasury Contracting Out Direction to services that have been contracted out to the private sector and on which the contractor then charges VAT. As with the activities that are to be treated as business, the services on which VAT can be recovered are listed in the London, Edinburgh and Belfast Gazettes.