There are increasing opportunities for private sector organisations to work alongside the largest healthcare provider in the world—the National Health Service (NHS) of the UK. But these opportunities present unique VAT challenges because the VAT treatment can make or break the commercial viability for suppliers and the NHS. 

There are at least two potential VAT pitfalls:

  1. The supply to the NHS may be exempt from VAT.
  2. If the supply is chargeable to VAT, the NHS may not be able to recover the VAT incurred.

These pitfalls have massive repercussions on the costing of a project and can produce great uncertainty. 

Unfortunately, these potential pitfalls are magnified with the increasing trend for NHS Trusts to put out to tender activities that involve supplying different products and services being provided as one combined package. The different elements may have different VAT liabilities when considered in isolation, or may be treated as one single composite supply with one VAT liability which increases the uncertainty of the VAT treatment.

Pitfall 1: Exempt supply

At first sight, a VAT exemption may sound attractive—and it's true that the supplier would not charge VAT on its exempt supplies—but the supplier would not be able to recover VAT incurred in the making of the exempt supply. Therefore, VAT becomes a cost to the supplier. Any cost must be factored into the pricing and where NHS budgets are tight, it is in no one's interest for costs to be increased.

It is often unclear what is exempt from VAT. It may be said that ignorance is bliss, but in this case, ignorance is a commercial nightmare. Being clear on what a service will cost to provide is obviously critical to any commercial venture. 

While there are many cases (both domestic and European judgments) that shed some light on whether a service is an exempt healthcare service, as NHS Trusts adapt to new demands, the nature of the products and services that they require will continue to evolve. This evolution of services will inevitably lead to uncertainty as the application of the exemption depends on whether each service can be characterised as a relevant clinical service.

Engaging with tax advisers at an early stage, and sometimes with HMRC, can help put a contractor in prime position to win work with NHS Trusts. This is because the NHS Trust will have clarity over the costs of a project, greater understanding on financial sustainability of outsourcing, and have the confidence that its supplier is responsible and financially sound in paying the correct amount of tax. 

Pitfall 2: Can the NHS recover the VAT?

If a supplier has to charge VAT, then obviously the NHS Trust will want to recover such VAT, otherwise it leaves it with less money in its budget to spend on other essential services. The problem is that the NHS is severely limited in what it can recover (as fulfilling its statutory duty to provide healthcare does not normally give the right to recover VAT incurred). 

Fortunately, there is a special VAT regime that allows the NHS to recover VAT incurred on a limited number of services. The key is whether the supplies are services, and if so, whether such services are covered under the list of services eligible for the special VAT regime. 

One common service, on which the NHS recovers VAT, is the operation of hospitals/healthcare facilities and any goods closely related to that supply. Sounds simple? However, the question of what is and what is not a healthcare facility, and indeed what are "goods closely related", are issues that can be worth a considerable amount of money to the NHS (and, therefore, also to the contractor) without there necessarily being a clear answer. 

Again, engaging with tax advisers at an early stage, and sometimes with HMRC, will allow a supplier to share its VAT insights with the NHS; this can be of enormous benefit to the parties including during a tendering process. 


We have found that a collaborative approach between a supplier, the relevant NHS Trusts and HMRC can be immensely valuable for all parties. There is no risk-free approach, but where the requirements of the NHS become more complex, we believe a collaborative approach helps cut through the uncertainty and provide suppliers and the NHS with a clearer basis upon which to build a successful partnership.