VAT and local authorities

Birmingham Skyline
By Anne-Marie Roberts, Head of Taxation – Scottish Taxes and Indirect Taxes

2 October 2015

HMRC has issued an updated version of VAT Notice 749 covering local authorities.

The notice includes comments on HMRC's views on the distinction between business and non-business activity which are relevant across the public sector.

VAT and the public sector has been an area of focus for ICAS and we have produced a paper which outlines the problems with the current UK VAT regime.

There are strong arguments to suggest that the UK VAT system for the public sector is not fiscally neutral.

VAT and Public Sector

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UK legislation splits public sector organisations into four types:

  • Local authorities and similar organisations (including the BBC) – section 33 VATA 1994 allows these organisations to recover all VAT incurred on activities related to the non-business functions of the organisation.
  • Government departments and the NHS and associated organisations – Section 41 VATA 1994 allows these organisations to recover input VAT in certain circumstances but they cannot recover VAT on non-business activities. The Treasury lists the services on which these departments are able to receive funding to compensate for irrecoverable VAT in the London, Edinburgh and Belfast Gazette.
  • Other public sector organisations – these are organisations that do not have any specific provisions that allow them to recover VAT on their activities which are for the public good.  These organisations use the standard income method to split their activities between business and non-business, and operate an appropriate partial exemption method to determine what input tax can be recovered. In the UK organisations dealt with under these arrangements are mainly charities, housing associations, universities.
  • Non-Departmental Public Bodies (NDPBs) which are effectively a separate category for VAT purposes. These are organisations which have a role in the processes of government, but are not a Government Department or part of one.

With the advent of new and innovative ways of delivering public services, there are circumstances where different parts of the public sector are working together to deliver services.  An example of this would be the integrated health and social care system – this involves local authorities (section 33) working with NHS bodies (in section 41) and with the charity sector (other public sector organisation). The differences in the VAT position of each of these sectors can lead to distortions.

The updated VAT notice 749 includes guidance for local authorities and other public bodies who are dealt with under section 33 VATA 1994.

The list of organisations to which section 33 applies can be found on the HMRC website.

The topics covered in the notice are:

  • When an organisation should register for VAT
  • The restrictions on public bodies joining VAT groups
  • The distinction between business and non-business activities
  • Recovering VAT on taxable business activities
  • Recovering VAT on costs relating to non-business activities
  • Recovering VAT on exempt business activities
  • The model special section 33 recovery method and partial exemption
  • Amendment to the special section 33 recovery method for the Capital Goods Scheme and changes of intent
  • Local Authorities and community projects
  • Public Bodies not registered for VAT

The full notice can be viewed on the website.


  • Tax

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