Tuesday, December 13, 2005



I noticed in The Times of Tuesday 13 December an article headed “Universities and hospitals face massive tax bill,” which basically says that where research doctors are hired by a research university and loaned out to a hospital the university is not providing a medical service to the hospital but is simply supplying it with staff.

I do not find the Glasgow VAT Tribunal decision at all surprising. What caught my eye is the journalist’s conclusion that it means that the future of academics in medicine is threatened “after a decision by Revenue & Customs to levy VAT on all shared use of staff” The article also quotes the finance director of University College London as having said “the Treasury appeared not to have realised the full significance of the Glasgow ruling…This does not help two organisations trying to deliver the same service. It is really unfair. When it comes down to it, it all ends up in the pocket of the Treasury. It is an enormous bureaucratic nightmare outside our control. It needs somebody to wake up and have a bit of commonsense.”

I am not normally a staunch defender of HMRC. However these remarks seem to misunderstand the role both of that organisation and of the Treasury in tax matters. The role of HMRC is to collect the taxes that Parliament lays down. I suspect that most of us would be fairly horrified if, in performing that role, HMRC were to take it upon itself to decide what is and is not fair. That surely should be a role of Parliament? For HMRC to say to itself “everyone likes the NHS so, in spite of what Parliament has enacted, we will let them off having to pay the tax that Parliament said is due” would be outrageous.

It would be equally outrageous for the Treasury to start telling HMRC which laws the Treasury thought it ought to enforce and which laws the Treasury feels are unfair and it wants HMRC to ignore. This is not a matter of someone needing to wake up and have a bit of commonsense. It is surely a matter of the citizenry expecting laws to be made by their elected representatives in Parliament and the Civil Service, including the Treasury and HMRC, to which the enforcement of Parliament’s laws is entrusted, to enforce the laws as Parliament has laid them down.

It would be perfectly legitimate for both The Times and the financial director of UCL to criticise Parliament for having enacted what they consider to be unreasonable and unfair laws, but to my mind they are themselves being unreasonable and unfair in blaming the messengers rather than the legislature that enacted the laws.

There is also of course a question as to where the unfairness lies. If Blackstone Franks LLP were to lend out staff to a client, which we occasionally do, would the fact that we have to charge VAT on the fee that the client paid us be equally unreasonable and unfair, or do they think there should be one tax system for universities and hospitals and a completely different tax system for everyone else?

In the case of sharing staff there is actually a route to achieve this which is well known by VAT practitioners, namely that the staff should be jointly employed by the university and hospital and they should have an agreement between them to share the cost of hiring the staff in proportion to the time for which each uses a person. Indeed the article goes on to state that Lord Warner has told the House of Lords “that a contract was being devised that would place clinical academic posts outside the scope of VAT”, so it is clear that the government fully accepts that such joint contracts are a legitimate way of dealing with the issue. Is it unreasonable and unfair that people who choose not to follow a well trodden path that avoids the imposition of VAT should find themselves in a different VAT position to those that choose to follow that path? I think not. Of course joint contracts have downsides. In particular, in this case, what would happen if a jointly employed surgeon were to botch an operation? Both would be liable to pay damages. However it is very normal in commercial contracts where a liability could fall on both parties for one to indemnify the other, so it is difficult to envisage why joint employment contracts with the NHS indemnifying the university for claims arising whilst the employee is working for the hospital might be impracticable.

There is a further issue with VAT. This is that VAT is a European tax, not a UK one. When we joined the EU we agreed to adopt the VAT law laid down in the EU Sixth Directive. This does not give even the UK parliament power to override the rules laid down in the Directive – although it does of course enable the EU institutions, which are mostly either democratically elected or made up of members nominated by democratically elected members, such as our Parliament, to change the law. One of the reasons why changes to VAT need the agreement of the EU is that the EU is largely financed by being paid a proportion of the VAT collected by each country. Accordingly, even if the UK parliament were to take the view that a supply of staff by Blackstone Franks LLP should be treated differently from a supply of staff by UCL, Parliament would itself be in breach of the Treaty obligations that it has entered into. Their would also be a very substantial risk that the EU Commission will take action against the UK in the European Court of Justice to force it to comply with EC law. Accordingly, even if The Times and UCL think that fairness requires the UK to be treated differently from anyone else who shares staff and opts not to use joint contracts, Parliament does not in reality have the power to gift such a privileged treatment to them.

The concept of VAT is that it is intended to be a universal tax within the EU and, although there are some exceptions, these are very narrowly defined. Accordingly to look for special treatment in relation to VAT is akin to crying for the moon. Whilst one might have sympathy for hard cases it is clearly impractical for a law that is intended to operate in exactly the same manner throughout the entire EU to be able to cater for such hard cases. Personally, I find it very hard to generate any sympathy at all in circumstances where there is a well trodden route to avoid the imposition of VAT and people choose not to follow it.

Robert W Maas


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