Government departments are entitled to reclaim VAT on the expenditure they incur where it relates to non-business actives, they are also able reclaim VAT on business activities where those business activities are taxable in a similar manner to ordinary commercial traders. The majority of the VAT refunds arise from non-business activities, such as providing health care. This right to reclaim VAT was implemented to encourage government departments to outsource activities to the private sector.
The legislation that provides for this ability to reclaim VAT on non-business activities is included within the main VAT Act and under this legislation HMRC are allowed to raise assessments against people where they have over reclaimed VAT. The question before the Court of Appeal (CoA) was whether HMRC are allowed to raise assessments against a government department, in this case a NHS Foundation Trust in Milton Keynes in respect of VAT reclaimed on their non-business activities.
The CoA held that HMRC could indeed raise assessments against a government department, noting that they:
- were all registered for VAT as they could not reclaim VAT on non-business supplies otherwise;
- were taxable people in regard to the business supplies they made;
- all submitted VAT returns in a similar fashion to commercial traders but with supplemental information for the VAT reclaimed on non-business activities;
- all submitted VAT returns by reference prescribed accounting periods; and
- were within the domestic scope of VAT while they were outside of the scope of EU VAT.
The CoA also noted that it would have been against the policy framework to not allow HMRC to raise assessments on government departments while further commenting that withdrawals from the consolidated fund of the revenue can only ever be authorised by Parliament, quoting an almost 100-year-old judgement from Viscount Harbour:
“… it has been a principle of the British Constitution now for more than two centuries … that no money can be taken out of the consolidated Fund into which the revenues of the State have been paid, excepting under a distinct authorisation from Parliament itself. The days are long gone by in which the Crown, or its servants, apart from Parliament, could give such an authorisation or ratify an improper payment. Any payment out of the consolidated Fund made without Parliamentary authority is simply illegal and ultra vires, and may be recovered by the Government if it can, as here, be traced.”
The decision can be found at: Milton Keynes Hospitals NHS Foundation Trust v HM Revenue & Customs (“HMRC”) [2021] EWCA Civ 942 (23 June 2021) (bailii.org)
Please contact us if you have any questions on VAT or trade with government departments. We can help detail to any contacts that any VAT on supplies made can be reclaimed by them.
