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HMRC internal manual

VAT Government and Public Bodies

Government departments and health authorities: Contracted Out Services (COS) Headings: COS Headings introduction

When can I reclaim VAT?
How do I interpret the Treasury’s Direction?
Recent developments
How to use this guidance


Government departments and health authorities have been encouraged to contract out services to the private sector which would have traditionally been performed in-house. It is recognised that many of these services would be subject to VAT and where they were acquired for ’non-business’ purposes, the non-reclaimable VAT could act as a disincentive to contracting-out.

It was therefore decided to compensate government departments and health authorities by a direct refund mechanism, which is provided for in section 41(3) of the VAT Act 1994. Under this provision, the Treasury issues a Direction, commonly known as the ‘Contracting Out Direction’ which lists both the government departments and health authorities that are eligible to claim refunds of VAT, and the services on which VAT can be refunded.

Originally there were separate lists of eligible services for each department/NHS body, but in the 1990s this was consolidated into a single list for all departments/NHS bodies. You are therefore not prevented from reclaiming VAT on the purchase of one of these services merely because you had never undertaken the activity in-house.  Additionally, VAT can be recovered on services supplied by another department under a shared services arrangements if the service is listed in the Contracting Out Direction.

A full list of the services on which VAT can be reclaimed under the Contracting Out Direction can be found in VATGPB9700.

When can I reclaim VAT?

Because refunds of VAT under this measure are met from public expenditure rather than VAT revenues, COS VAT should normally be claimed within the financial year in which the supply in question has been received - subject to a 3 month adjustment period - the adjustment can be made no later than the June VAT return following the financial year end. By “the supply in question has been received”, we mean the tax point. While the tax point is normally the invoice date, this is not always the case. Continuous supplies may have a payment tax point.

In circumstances where you have received a supply on which no VAT has been charged by the supplier and they subsequently issue you with a VAT only invoice, you can recover the COS VAT in the period in which you received the VAT invoice.

Are there any exceptions to the normal claim period for COS VAT?

In the following circumstances, you can make a claim outside the financial year in which the supply was received:

  1. Where HMRC has instructed a government department or NHS body that it cannot claim COS VAT on a particular supply and this turns out to be incorrect – in these circumstances, the four-year cap applies.
  2. Where a government department or NHS body has asked whether a supply it has received is covered by a particular COS heading, and by the time HMRC confirms that COS VAT is recoverable the time limits for claiming have passed – in these circumstances the four-year cap applies.
  3. Where there is uncertainty within the NHS (as a whole) or government departments (as a whole) whether, in relation to a particular service, COS VAT can be recovered and this is not resolved by HMRC until after the time limits for claiming have expired – in these circumstances the four year cap applies.

Can I adjust a COS VAT claim I have already made?

The requirement to claim COS VAT within the financial year in which the supply is received is restricted to the actual claim itself. If a claim is made at the correct time, any adjustment to that claim must be made within the normal time limits for adjusting input tax (please see Notice 700/45).

For example:

  • There may have been an error in the amount claimed (but an amount has to have been claimed).
  • The price paid for the service in question may have subsequently increased or decreased.
  • The claim itself may have been subject to a further calculation, such as a ‘business : non-business’ calculation, which itself is adjusted at a later date because of a higher or lower non-business ratio.

Single/Multiple supplies

When considering whether a supply qualifies for recovery under one of the COS Headings, Government departments and NHS bodies should initially refer to guidance in the VAT Supply and Consideration manual to determine whether the supply they are receiving is a single or multiple supply. When this has been determined you should then consider whether the supply falls within one of the COS Headings and is eligible for recovery.

If the supply is a single supply then the predominant nature of the supply will determine whether it is eligible for recovery under COS.

Where you receive a multiple supply, recovery on each separate supply can be claimed under the appropriate COS Heading.

How do I interpret the Treasury’s Direction?

We have provided some advice and examples, but they cannot be exhaustive. The purpose of the Direction should always be considered - namely to ensure that what would otherwise be irrecoverable VAT does not dissuade you from contracting out a service to the private or voluntary sector. If the service you are purchasing was never performed within the government department or the health authority, it is most unlikely to fall within the ambit of the Direction.

Section 41(3) of the VAT Act 1994 refunds VAT ‘if and to the extent that the Treasury so direct’. There may be occasions where the Direction is limited to a set of circumstances prevailing at a particular time. Where this has happened, we explain the position under the relevant heading. Some Headings are seldom used, or are bespoke to a particular department, and we do not provide explanations for these. Additionally, we ask you to continue to use the individual pieces of guidance to government departments and NHS bodies on heading 52 for a short while longer until the outcome of HM Treasury’s review of its Direction is known.

Recent developments

HM Treasury has agreed that COS refunds may be claimed for the following activities. Until a revised Direction is published, if you are uncertain which Heading to use, please use Heading 2.:

  1. Call centre and contact centre services
  2. Services provided through International Trade Advisers for UK Trade and Investment
  3. Services provided under Framework for Procuring External Support for Commissioners (FESC) other than:
  • Supplies of computer services and professional services that are excluded from the scope of Headings 14 and 52 above, unless the Treasury directs otherwise, and
  • Elsewhere, the supply of staff.

Top of page

How do I request a new heading in the Treasury’s Direction?

HM Treasury will consider requests for a new heading in the Direction, but please be aware that they will require a detailed business case from you. Please would you provide this to your Customer Compliance Manager (CCM) or if you do not have a dedicated CCM please send your application to the following email address: Please note the submission of any informaiton to this email address or any reply from HMRC is not secure from interception. The reply to your quesiton(s) will only be sent to the email address that you provide if we can verify that you are authorised to receive the informaiton you have requested. Our reply may include informaiton that wehold about your tax affairs. If you do not wish to receive a reply by email please advise us and our reply will be sent to you by post to the address you provide.

Alternatively, please write to:

      Wealthy/Mid-sized Business Compliance

      HM Revenue & Customs



      NE98 1ZZ


What the Treasury will require Why they need this information
1. A full description of the service or activity in question. To ensure that if your application is successful, the new heading accurately reflects the contracted-out service you will be receiving.
2a. If it is an existing service or activity, how is it presently provided (for example, in-house, already outsourced, through an arms-length body) When Treasury are considering requests for a new headings they look at whether VAT will be a barrier to outsourcing and why outsourcing offers best value for money
2b. What options are being, or have been, considered? For example, in-house provision, part in-house provision, phased outsourcing, full outsourcing When Treasury are considering requests for a new headings they look at whether VAT will be a barrier to outsourcing and why outsourcing offers best value for money.
2c.  Why would oursourcing offer value for money? What are the financial, efficiency etc. benefits? When Treasury are considering requests for a new headings they look at whether VAT will be a barrier to outsourcing and why outsourcing offers best value for money.
3.  An estimate of the VAT you will recover each year for the next five years if your application is successful. Required for the purposes of the National accounts.
4.  The date from which you wish the new Heading to take effect. To provide a timescale. Please be aware that you will need to wait for a new Treasury direction to be published in the Government Gazettes, and the process for renewing a Direction can be a lengthy one. HM Treasury receives a substantial number of requests for new headings, which require Ministerial approval.



How to use this guidance

To find out what is eligible for recovery under a specific COS Heading, go to VATGPB9700. This will provide a list of the Headings; you can then select the appropriate VATGPB link which will take you to the guidance for that Heading.

As with all lists, this guidance could soon become out of date because of the pace of change. We ask you to share these changes with us, and other departments and NHS bodies, so that this guidance can be kept updated.