Introduction Background Note
7.Article 13(1) provides that public bodies (Government departments, local authorities and analogous institutions) should not be taxed when making supplies of goods and services unless those supplies arise out of Annex 1 activities (which are not negligible) or relief from VAT would cause significant distortions of competition.
8.There is no explicit transposition of Article 13(1) into UK legislation.  HMRC has given effect to the Article by interpreting existing legislation in a way that achieves the correct result for the Article's purposes.  However recent litigation has cast significant doubt on whether this approach amounts to an effective implementation of Article 13(1).
9.This provision puts the effective implementation of the article beyond doubt and therefore precludes the possibility of infraction proceedings being taken against the UK. In practice public bodies should see no change to their existing tax treatment as a result of the legislative changes.  It also provides a clear legislative base for applying the appropriate test to determine whether a particular supply is taxable in an environment where public and private sector provision is constantly evolving.