Ruling allows public bodies to recoup VAT

22 Sep 05
Public bodies, such as NHS trusts and colleges, are now eligible to defer payment of millions of pounds in VAT, following a European Court of Justice ruling.

23 September 2005

Public bodies, such as NHS trusts and colleges, are now eligible to defer payment of millions of pounds in VAT, following a European Court of Justice ruling.

The concession relates to the VAT paid to Revenue & Customs on buildings used for both business – such as hospital wards used for private patients or commercially run kitchens – and non-business use.

For most public bodies, the majority of capital expenditure relates to non-business use – primary functions such as medical care or education – and so is taxed at 17.5% on the day of purchase. VAT on assets for commercial use can be recouped.

The new ruling means that bodies can apply to R&C to have most of the VAT returned at once, and spread the payments that relate to non-business use over the life of the asset.

James Burberry, partner at PricewaterhouseCoopers Scotland, told Public Finance: 'What this ruling means is that you can claim more of the VAT back on day one. Then, over the useful life of that asset, say 20 years, you can start paying back the VAT that is due.

'So you get a cash flow benefit which can be used to make the funding go further and reduce the initial costs of borrowing.'

The repayment mechanism is known as the Lennartz principle and was first established through a 1991 ECJ case. The UK Finance Act 2003 included legislation to prevent businesses exploiting the principle for tax avoidance purposes. That has now been superseded by the ECJ ruling.

Claims to recoup paid VAT could date back to April 2003. However, the R&C is giving claimants only a six-month window to apply. A spokesman told PF: 'We will not be making explicit efforts in relation to government bodies.'

PFsep2005

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