Scottish Public Finance Manual

The Scottish Public Finance Manual (SPFM) is issued by the Scottish Ministers to provide guidance on the proper handling and reporting of public funds.



1. This section gives guidance on the application of VAT with particular regard to bodies registered with HM Revenue & Customs (HMRC).

Key points 

2. Public sector organisations should not engage in, or connive at, tax evasion, tax avoidance or tax planning. If a public sector organisation were to obtain financial advantage by moderating the tax paid by a contractor, supplier or other counterparty, it would usually mean that the UK Exchequer as a whole would be worse off – thus conflicting with the accountable officer’s duties. Thus artificial tax avoidance schemes should normally be rejected. It should be standard practice to consult HMRC about transactions involving non-standard approaches to tax before going ahead. 

3. There are a number of different categories of public bodies, and there is of course no problem with using tax advisers to help meet normal legitimate requirements of carrying on public business. These include administration of VAT, PAYE and NICs, where expert help can be useful and efficient. In entering into a contract with advisers, however, it is important that fees paid are not based on a commission basis.

Public bodies VAT recoverability

4. Public Body’s ability to recover input VAT will be determined by their status, but all registered bodies must charge VAT on their business supplies. The VAT Act defines the bodies' ability to recover VAT. The categories include, but are not limited to:

  • Crown Bodies
  • Local authorities and other "Section 33" bodies
  • Health authorities
  • Non-departmental Public Bodies
  • Trading Funds

5. Guidance on the VAT relationship between Government Departments (GDs), Non-departmental Public Bodies (NDPBs), Executive Agencies and Trading Funds is provided in the table at Annex A.

6. The guidance in the table in Annex A is not exhaustive. For example, VAT issues must be taken into account where the setting up of a new body, or the merger of bodies, is under consideration. The Scottish Government VAT Advisory Team should be consulted at this stage and they will, where necessary, seek clarification/guidance from HMRC.

7. A simplified diagrammatic view of the position with public bodies, is provided in Annex B.

8. Public Sector bodies fall within four different elements under the VAT Act; Crown Bodies; Section 33 Bodies; Executive NDPBs and Trading Funds.

Crown bodies and health authorities

9. The VAT ACT 1994 section 41 states that the Crown Body for Scotland is the Scottish Administration.

10. VAT is payable by GDs on the importation or acquisition of most goods and services. However, it is the legal responsibility of VAT- registered suppliers to decide the tax liability of the supplies that they make.

11. GDs shall charge VAT on any taxable supplies made in the course or furtherance of business activities i.e. where there is competition with the private sector.

12. GDs are entitled to reclaim (or deduct from the output tax they are due to pay), the input tax they incur on purchases for their business activities, GDs can also reclaim the input tax on those non-business activities specified in HM Treasury’s Contracting-Out Directions.

Ability to recover input VAT

13. A crown body has in effect two recovery streams:

  • Contracting-out (CO) Directions

14. The HM Treasury Contracting-out Directions details a list of eligible services that a Government Department can claim refunds of VAT. The list reflects services which would have traditionally been performed in-house. The prime source of information on Contracted Out Services headings is the HMRC COS Direction Guidance.

  • Business Activity

15. Like a normal business, a GD can recover VAT incurred in respect of acquisitions or purchases that have been incurred in order to supply a Vatable output. If for instance you buy licenses for software which you then supply to the wider public sector you would be able to recover the VAT on the purchases but have to charge VAT on the sales. 

Section 33 bodies

16. Section 33 bodies are primarily local authorities and bodies that are carrying out duties previously carried out by local authorities. In order to be permitted as a section 33, a body previously had to comply with:

  • Carrying out duties previously carried out by a local authority


  • Have a power of precept over local taxation

Section 33 bodies are able to recover virtually all of the VAT paid.

Non-departmental public bodies

17. There are two different types of NDPBs:


18. An Executive NDPB is at arms-length from Government and cannot be incorporated within a Crown Bodies VAT registration.

19. As an Executive NDPB, you will only be able to recover a proportion of the VAT incurred on taxable supplies used to support your business activities.


20. An Advisory NDPB, unlike an Executive NDPB is treated as an integral part of a Government Department and are part of the GD’s VAT registration.

21. An Advisory NDPB will be able to reclaim VAT in line with a Crown Body. 

Trading funds

22. A Trading Fund is operated very much as a business with VAT only being recovered on the business related activities. Trading Funds are unable to recover VAT under the Contracted Out Services but are permitted to be part of a GD VAT registration. 

Tax invoices

23. Like any other VAT registered organisation, a public sector body must charge VAT where they are providing a taxable supply.

24. When GDs supply taxable goods or services to a taxable person they must issue that person with a sales invoice showing the amount of VAT and certain other particulars. This is known as a tax invoice, which is an important document, because it is the principal evidence to support the customer's VAT return.

The key features of a VAT invoice are:

  • a unique and sequential identifying number (commonly known as invoice number)
  • the supplier's name, address and VAT registration number
  • the date of issue of the invoice
  • time of supply (tax point) - if different from date of issue of the invoice
  • the customer's name (or trading name) and address
  • a description identifying the goods or services supplied
  • the unit price
  • the rate of any cash discount offered
  • the total amount of VAT charged, shown in sterling
  • the total amount payable, excluding VAT

For each description of goods and services it must show the following:

  • quantity of goods or extent of the services
  • rate of VAT
  • amount payable, excluding VAT

25. For some low value invoices less information can be provided. If there is uncertainty over whether an invoice meets the minimum requirements advice should be sought from the VAT Advisory Team.

Key messages:

Considering VAT implications

26. Ensure there is early engagement with the VAT Team prior to issuing a purchase order (PO) or issuing invitations to tender (ITT’s) if there is any uncertainties with the treatment of VAT.

27. It is good practice to consider in association with your VAT Team the VAT implications for all contracts worth in excess of £1 million.


28. Consider the impact of VAT on budgets. Budgets should be based on the cost net of recoverable VAT and budget holders should be familiar with the most up to date rules and governance when paying and reclaiming VAT.

VAT status of suppliers and supplies

29. The VAT status of suppliers - whilst non VAT-registered suppliers will not charge VAT, they also will be unable to recover VAT on their costs and as such they will pass on the unrecovered VAT element of their costs to the GD. VAT registered traders will be able to reclaim the VAT in their costs possibly leading to reduced charges.

30. The VAT status of the supply - VAT will have to be charged on sales to the private sector or other separately registered GDs if deemed to be business activities. VAT can be reclaimed on certain purchases which can be directly attributed to the sale.

Off system purchases

31. There will be occasions where a business area has used other methods of purchasing goods, such as procurement cards, credit cards etc. In all occasions these transactions will have to be manually reflected within the Finance system. If there are any uncertainties on how to reflect recoverable VAT items, advice should be sought from your relevant VAT Team

Non UK transactions

 32. There are various types of transactions which are classed as being outwith the UK. HMRC guidance can be found here

These can include:

  • Acquisition of goods from EU countries - acquisition tax would be charged on such goods. i.e. VAT charged at the UK tax rate applicable for the goods.
  • Services received in the UK from another EU Country - If the services are received in the UK then UK VAT would apply.
  • Services received or events attended in other EU countries - Local tax would apply i.e. French VAT etc.
  • Acquisition of land in another EU Country - The local tax rate applicable for the location of the land applies.
  • Goods imported from non EU countries - The tax applicable on goods within the UK is charged at the point of entry into the UK.
  • Sales Invoices issued to EU Countries - All goods and services provided or sold to other EU member states are treated as zero rated if the recipient provides a recognised VAT registration number. If no VAT registration number is provided the normal VAT rules apply.

Further guidance and contacts

33. There is further basic VAT guidance, including VAT TV and VAT Practical Activities available on the Learning Management Portal for SG staff.

34. All VAT enquiries should be sent to

Page updated: June 2019

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