To encourage government departments to use private sector suppliers the Government of the day, back in 2002 introduced a credit system whereby government departments could claim refunds of VAT from HMRC where the supplies made to them were not for their business activities.  Many government departments do perform business activities but the majority of their activities are not business, such as an  NHS trust providing medical care free at the point of use.  Government departments are required to register for VAT and account for it in a similar manner to all other private traders.

The Northumbria Healthcare NHS Trust (the Trust) leased many cars and onward let them to other government departments such as local authorities.  This was considered a business and the Trust was registered for VAT for this purpose and charged VAT on its onward supplies of leased cars.  It also supplied leased cars to its own employees and claimed for a credit in respect of these supplies to it.  A credit in this case is different from the deduction of input VAT.

HMRC held that this was incorrect as the Trust was able to provide leased cars to its employees with the deduction of VAT that would not be possible for any other taxable person.  There is an order that doesn’t permit the deduction of input VAT by taxable persons on cars where they are not used exclusively for business purposes.  So, when a non-governmental employer purchases a car to make it available to an employee for private as well as business purposes it cannot reclaim any VAT.  In this case the Trust was able to recover the VAT in full.

The Court of Appeal decided that this was an effect of the legislation as the Trust wasn’t a taxable person for the purpose of the order that blocked the reclamation of input VAT.  In the case of the Trust, it could have its cake and eat it.

The decision can be found at: Revenue And Customs v Northumbria Healthcare NHS Foundation Trust – Find case law (nationalarchives.gov.uk)

While this decision is only appliable to government departments that can utilise the credit system it does highlight that government departments can make significant savings when using private enterprises to provide goods and services.

Please contact us if you undertake business with a government department and are charging VAT on your supplies.  We can help ensure that any contacts are aware of the beneficial VAT treatment applied to government departments.