Government departments, NHS Trusts, devolved administrations and Highways England are currently allowed to recover VAT on non-business activities if the expenditure relates to one of a long list of services specified in the Treasury Direction of 2 December 2002. These are typically referred to as the Contracted-Out Services (COS) headings.
This limited form of VAT recovery was first introduced in 1984. The intention of this form of recovery was to encourage public bodies to outsource services that it was felt could be carried out more efficiently by the private sector. The idea was that, by removing the VAT burden on paying a third party to carry out those services, public bodies would be more inclined to contract-out these services. Initially, the headings were limited to 11 types of services but this has grown over time to include 76 service headings.
In 2017, the Office for Tax Simplification carried out a review of the VAT system which singled out the COS rules as an area of particular complexity. There was concern that these could distort procurement decisions and the way in which goods or services are provided to the public sector. This prompted the Treasury to consider reform of the COS rules and it released a policy paper setting out its proposals on 27 August 2020.
Source: addleshawgoddard.com
