2.5.25 Goods and services procured by government should generally be costed gross of tax and subsidies. The ideal would be to assess all options net of tax and subsidies, but this is not generally straightforward and in most cases the costs of options can be compared gross of tax and subsidies without biasing the appraisal. In practice it is rarely worthwhile to adjust market prices for taxes or subsidies.
2.5.26 However, in some circumstances it will be appropriate to consider adjusting for taxes and subsidies For instance, adjustment may be necessary where land is subsidised - see 2.5.34 and 2.5.47 below. The need to make adjustment arises primarily where the tax structures of options differ very substantially in nature, such that failure to allow for differing tax treatment could distort the choice of best option.
2.5.27 This is particularly relevant when appraising proposals under the PPP, because the contractor is subject to a different tax treatment than a public provider. NHSScotland Bodies should follow the detailed HM Treasury guidance on the required adjustments in PPP cases (see SCIM PPP Guide).
2.5.28 It is important to adjust for any tax differences between options arising from different contractual arrangements, such as in-house supply versus buying in, or lease versus purchase. For example, when considering contracting out a service that was previously provided in-house, at least a part of the tax payable by the contractors and their funders would not have been paid under a "do minimum" option of continued in-house provision.
2.5.29 Adjustment for indirect taxes such as VAT is not generally required. It is appropriate only where the adjustment may make a material difference, and this is a matter for case by case judgement. However, adjustment is required where options attract different VAT conventions e.g. new build versus refurbishment. Such options should usually be compared as if either the same VAT payments or none were made in all options.
2.5.30 Where a decision is taken to exclude VAT or any other tax or subsidy from an appraisal, this fact should be noted in the appraisal report. In such cases, the excluded tax or subsidy should be accounted for in any separate financial appraisal.