G-Cloud / CloudStore & VAT

Background

HMRC have specific rules (VATGPB9340 - Government departments and health authorities: VAT law: VAT recovery on non-business activities) on which Government bodies can reclaim VAT back on which services and products.

HMRC is empowered to refund VAT to Government Departments on contracted out services listed in the Contracting-Out Direction provided that: 

• They have been purchased for (non-business) statutory purposes; and 

• they meet the conditions of being contracted out; and 

• The claim meets any conditions that may be laid down regarding timing, form, and manner. 

Who can claim refunds under the Direction? 

The following bodies can claim refunds of VAT on the purchase of services detailed in list 2 of the Direction, provided these are used for non business activities: 

• Houses of Parliament,

• Government departments which are recognised as such by the 

• Cabinet Office, Welsh Government, Scottish Government or Northern Ireland Executive and the devolved administrations themselves, 

• certain agencies of government departments, 

• Named NHS bodies, 

• Crown NDPBs

So, what activities can these departments reclaim the VAT?

There is a list of 76 categories where Government Departments can reclaim VAT, but the one we are interested in is number 14;

14. Computer services supplied to the specification of the recipient

Includes:

• the provision by one or more suppliers of a fully managed and serviced computer infrastructure either using the recipients' own hardware or hardware provided by the supplier as part of the infrastructure; and 

• the development, delivery and support of bespoke software.

Excludes:

• supply and support of off-the-shelf software;

• hire of hardware alone;

• line rental alone;

• telephony; and

• hire of computer consultants to add expertise to in-house IT teams.

Previously the scope of the heading reflected the PFI type procurements common in IT where the infrastructure had to be provided by a single provider on hardware owned by the provider. Treasury have recognised that the use of single providers is no longer viewed as always giving the best service and that for security and continuity reasons departments may wish to retain ownership of the hardware (even though under a PFI arrangement this decreases the transfer of risk from the department). 

Analysis

Lets take a look at this closer. At first glance it looks like it could be good for services;

• the provision by one or more suppliers of a fully managed and serviced computer infrastructure either using the recipients' own hardware or hardware provided by the supplier as part of the infrastructure; and 

• the development, delivery and support of bespoke software.

This is good if you are asking a supplier to build a bespoke Cloud service to the specification of the recipient, but the services within the CloudStore are commodity and 'off-the-shelf'. This is a grey area.

The killer blow to cloud services is this;

Excludes:

• supply and support of off-the-shelf software;

As the same service is provided to multiple customers, it's difficult to argue that it is bespoke and therefore the VAT cannot be reclaimed. The rule excludes 'off-the-shelf' software. So it looks like Government Departments are unable to reclaim the VAT on cloud services.

ICT Consultancy

To add to this, HMRC has also stopped Government Departments claiming the VAT on cloud consultancy services;

Excludes:

• hire of computer consultants to add expertise to in-house IT teams.

Again this is a grey area, I'm yet to find the HMRC's definition of 'computer consultants', but The Crown Commercial Service (CCS) provided definitions are below;

Temporary (non-payroll) Staff

CCS define temporary staff as follows: 

The provision of workers to cover business-as-usual or service delivery activities within an organisation. Temporary Staff are also often referred to as “Contingent Labour”.

Consultancy 

CCS define consultancy as follows:

The provision to management of objective advice relating to strategy, structure, management or operations of an organisation, in pursuit of its purposes and objectives. Such advice will be provided outside the ‘business-as-usual’ environment when in-house skills are not available and will be time-limited. Consultancy may include the identification of options with recommendations, or assistance with (but not the delivery of) the implementation of solutions.

ICT Consultancy

CCS define ICT consultancy as follows:

The provision of objective IT/IS advice including that relating to IT/ IS systems and concepts, strategic IT/IS studies and development of specific IT/IS projects. Advice related to defining information needs, computer feasibility studies, making computer hardware evaluations and to e-business should also be included. 

Again it's grey is the VAT can be claimed for Specialist Cloud Services.

Bespoke or Commodity?

• Government Departments can reclaim the VAT on fully managed outsourced IT systems
• NHS is allowed to reclaim VAT on outsourced systems
• Government Departments can recliam VAT on bespoke computer systems
• Government Departments cannot reclaim VAT on commodity cloud services

• Government Departments can reclaim the VAT on bespoke cloud services

What's the definition of Bespoke Cloud Services?

The NHS has released their business case for NHSMail2 and this will use cloud services. They have published the official response from HMRC within their business case, extract below;

As you are aware whether or not VAT on your proposed new e-mail system can be claimed is a grey area. The limitations of the heading state that an off the shelf package is not included within the scope of the heading but a bespoke package, tailored to the needs of the user is claimable.

There is no doubt that the procurement of a managed email and collaboration service is a computer service meeting the requirements of COS heading 14 but the grey area is whether or not the procured package is an off the shelf package (non claimable) or whether or not it has been tailored enough to be classed as bespoke (claimable).

I have relied on the part of your VAT information document that states that there is no exact service that meets the department's needs and therefore materially significant developments to the existing package taking 3 - 6 months to complete is required. The NHSmail2 document you sent me does in fact show some significant alterations supporting your view that the package can only be used by the NHS.

I am satisfied that the NHSmail 2 contract meets the criteria of COS heading 14 and is therefore claimable. 

Conclusion

It's all a bit screwed up. The Cabinet Office wants Government Departments to consume commodity services via the CloudStore, but HMRC VAT policies encourage Government Departments to bespoke their ICT services.

It gives an unfair advantage on bespoke outsourced IT systems as the VAT can be reclaimed.

It encourages Government Departments to create larger outsourcing contracts, instead of splitting the large contracts and consuming comodity services via the CloudStore