Exclusive The public sector is committing millions of pounds of tax fraud by incorrectly claiming money back on IT services which are not VAT recoverable.
Under VAT rules, government bodies can claim back 20 per cent of the price of IT services that are managed by a large provider, as well as bespoke custom-made software. Money spent on off-the-shelf software, hardware and interim IT staff is not eligible for recovery.
Thanks to a lack of clarity in the rules as to what constitutes a "managed service" many bodies are falsely claiming back VAT, say tax experts.
Archer Davis from tax consultancy Berthold Bauer said incorrect VAT claims in the NHS alone amount to “millions”. He said the amounts differ between trusts.
El Reg analysed the Cabinet Office's spending accounts for 2013/14 and found the department had marked £3m of hardware, G-cloud services and interim IT staff as "VAT recoverable".
However, the Cabinet Office said it was "completely untrue" it had wrongly claimed VAT refunds, as its figures are regularly audited. It said the words “VAT recov” reflect the coding that was initially used for the purchases and not VAT claimed back.
Kenny Lee, tax expert at VAT consultants Liaison, said: "It is a grey area, but the revenue office has started clamping down."
He added while no one would go to prison for false VAT claims, HMRC was targeting individual departments and making them pay back the tax.
Berthold Bauer's Davis said new HMRC guidance due to come into force "should bring clarity" to organisations as to what they are entitled to claim, which will clearly state "VAT costs for off the shelf internet ‘Cloud’ IT infrastructures cannot be refunded."
However, this contradicts moves by central government to encourage the public sector to buy cheap, off-the-shelf cloud services by providing a tax disincentive for those that do.
In response to a Parliamentary question about the effect HMRC's rules on VAT have had on cloud services, exchequer secretary David Gauke said no estimate has been made.
El Reg asked HMRC for a statement but it declined to comment on cases of individual departments and trusts.
The rules governing Contracted Out Services (COS) and claiming VAT refunds are under section 41(3) of the VAT Act 1994. ®