The NHS has been given a reprieve from an estimated £500m tax bill after HM Revenue and Customs backtracked on its attempt to standardise VAT rules on contracted out services across all government departments.

The change of tack came in a letter circulated by HMRC to NHS organisations last week.

It said the department “now appreciate[s] that there are some areas where the guidance notes written for government departments are either not relevant to the NHS or can cause confusion for NHS bodies”.

“We are sorry about this,” the letter continued. “Our intention has always been for consistency and accuracy”.

The letter came just weeks after HMRC instructed trusts to follow from 1 April VAT recovery guidance it issued to government departments in 2012.

Tax experts warned this would have meant the NHS could no longer reclaim VAT on some categories of agency staffing and professional services.

NHS organisations had previously been subject to guidance written specifically for the health service in 2005.

As HSJ reported in March, an analysis by auditors EY found that the loss of recoverable VAT could have cost the NHS more than £500m.

Kenny Lee, head of tax services at financial consultancy Liaison, welcomed the “return to the status quo”.

He said the potential loss of recoverable VAT on repairs and renovation contractors would have had “far reaching consequences financially… for planning and budgets”.

The time given to implement the proposed changes would have left a “massive shortfall in VAT recovery” in NHS organisations’ budgets, he added.

Audrey Fearing, a partner at EY’s indirect tax team, said: “Only giving trusts a month to get their VAT accounting systems altered… was very problematic.

“It gave them no leeway to try to adjust budgets, because they had agreed most of the budgets and most of the pricing with Monitor some months beforehand.”

Ms Fearing said she would now like to see “a proper consultation process and proper dialogue and engagement with the sector, so that everybody has clarity about… how VAT is going to be applied to the NHS”.

A spokesman for HMRC said: “We are not aware of any financial difficulty this has caused over the very few weeks since we wrote to NHS trusts about this.”

HMRC was now devising a “single comprehensive book of guidance that meets the needs of both NHS bodies and government departments,” he added.

He said the tax office was “contented” for NHS bodies “to continue to use the guidance written specifically for the NHS from 2005 onwards”.

However, HMRC remained concerned that some NHS organisations “misunderstood” the rules around recovering VAT for agency workers who covered staff shortages, he added.

“The Treasury refunds the VAT paid by NHS bodies on certain services which have been contracted out to the private or voluntary sectors.

“It does not include the hiring in of agency staff to cover, for example, staff shortages in the trust’s administration support unit.”

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