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HMRC internal manual

VAT Government and Public Bodies

Government departments and health authorities: Contracted Out Services (COS) Headings: COS Heading 6 - Roads: Section 278 Agreements

Alteration, repair and maintenance of road schemes, except (a) any works carried out pursuant to an agreement made under section 278 of the Highways Act 1980, or (b) works involving construction on land not already used for road schemes

The key point to this Heading is that it only applies to existing road schemes, so there would be no recovery allowed on the construction of a new road. Where a new stretch of road is added to an existing road scheme so it reaches a new destination, VAT can be recovered on changes to the existing road, for example to road markings, adjustments to the existing pavements and curbs.

Section 278 Agreements

Section 278 of the Highways Act 1980 allows a Highways Authority (HA) to seek contributions from developers towards the cost of works considered to be for the ‘common good’. For example, these works could include the construction of a new slip road or roundabout.

Any work carried out by a HA under a section 278 agreement is a non-business activity for VAT purposes. This is because the HA has a statutory responsibility under the Highways Act 1980, to maintain the road on which the work is carried out. As such, the construction works form part of the HA’s statutory responsibilities for maintaining the road.

As the HA is not able to claim a refund of the VAT under section 41(3) of the VAT Act 1994, it is a condition of the section 278 agreement that the contributions they receive include irrecoverable VAT.

The HA cannot issue a VAT invoice to the bodies making contributions because it is seeking a reimbursement of costs and not making a supply.

The contributor will be unable to recover any VAT element included in the contribution they pay to the HA. This is because the VAT amount does not relate to a supply, which has been made to you. The contractor carrying out the works will always be making a supply to the HA.

Hybrid Road Schemes

‘Hybrid Road Schemes’ are works comprised of new construction together with improvements to the existing road schemes.

As the hybrid schemes involve two types of work, new construction and alteration, the costs must be separately identified for VAT purposes. This is because some of the VAT incurred on new construction undertaken in the hybrid scheme cannot be recovered.

It can sometimes prove very difficult to separate the actual expenditure on new construction from that on alteration etc. HMRC allows an apportionment of costs to be made based on the terms of the additional contract.

In cases where it is not possible to directly attribute VAT elements, apportionment may be allowed. Hybrid road schemes are an example of a situation where permission to apportion the VAT has been granted.

Smart Motorways

The alteration of a stretch of motorway to become a smart motorway, and then the alteration, repair and maintenance of the smart motorway, are recoverable under Heading 6. This includes the construction of emergency exit-ways when the hard shoulder is used as a traffic lane and also the installation, repair and maintenance of gantries and signs on smart motorways, this includes the installation of the IT infrastructure.


The construction of new tunnels is not eligible for recovery under Heading 6. However, where a tunnel is built under an existing road scheme and this requires structural alterations or repairs to the existing road scheme, these costs will be eligible for recovery under this Heading. Repairs to existing tunnels which are under a road scheme are recoverable under this Heading.


Construction of new road bridges is not recoverable under this Heading. Repairs to existing bridges are recoverable under Heading 36.


Heading 6 also covers the peripherals which are part of the road system like the paths, lighting, roundabouts, pedestrian crossings, refuges and noise barriers. New paths added to existing road schemes are also recoverable under this Heading.


  • Where a health authority alters the layout of existing roads surrounding a hospital for example, in order to facilitate easier and/or safer access to the accident and emergency department. It would also extend to the repair and maintenance of such a road scheme


  • Winter road clearing and gritting services
  • Erecting and maintaining of traffic signs that do not fall within the designated area of the smart motorway