Feature / Finance explained

THE DEPARTMENT OF HEALTH has underlined that there is no difference in the VAT treatment of asset valuations, whether the assets have been funded through the private finance initiative or funded with NHS resources, writes Steve Brown.

There is no change in accounting policy. However, the Department has decided to clarify the issue following queries from NHS finance managers. It said the queries were ‘prompted by the VAT-free status of PFI unitary charges’, although Healthcare Finance understands that specialist VAT advice providers had been highlighting an opportunity to reduce costs.

NHS bodies have to show asset values at depreciated replacement cost (the replacement cost of a modern equivalent asset, depreciated to reflect the age and use of the asset). The argument being tested by finance managers making the queries was whether these valuations could exclude VAT charged on the building cost, given that the third-party PFI providers can claim back the VAT on reconstruction costs.

The impact for NHS bodies would clearly have been significant in terms of the amount of depreciation they paid on any on-balance sheet PFI assets. With VAT at 20% of asset cost, the difference in depreciation could have been considerable. The Department has been categorical in dismissing this approach. ‘When valuations are prepared for PFI assets, please ensure VAT is included in any valuation on the same basis as for non-PFI assets,’ it said.

Its clarification was based on international financial reporting standard rules, which stipulate that following initial assessment, the PFI asset should be treated the same as any other item of plant, property and equipment.

Merger accounting clarification
The Department has also confirmed the approach on merger accounting (see Finance explained, Healthcare Finance March 2011, page 28).
Organisations involved with taking on community services under the Transforming community services initiative have been required to follow merger accounting principles. This means that the ‘receiving’ body has to show the combined results and financial positions in 2010/11 accounts as if the services had always been combined.
The divesting body similarly excludes all transactions relating to the transferred activity. Full restatement of comparators is not required if impracticable.