VAT update for the Care Sector

The operation of care homes and provision of social care is often heavily, or even entirely, exempt activity for VAT purposes. This means that operators often assume that irrecoverable VAT costs will be suffered, whereas there are some areas where this cost can be mitigated.

Zach Annette explains

As the provision of social care and welfare is generally exempt for UK VAT purposes, VAT is not usually charged to service users or to the funding bodies such as local authorities. 

Whilst this presents an apparent cost saving to the users, the key impact for care homes of being either entirely or mostly exempt is that VAT on purchases becomes an absolute cost i.e. it is irrecoverable.

For this reason, operators of care homes can sometimes disregard the importance VAT in their day-to-day operations. 

Our VAT team have noted below key areas they have been working on in the sector most recently.

VAT opportunities

For care home operators, the biggest opportunity is to reduce VAT costs at source by ensuring that the available reliefs are utilised. 

Whilst charging the correct amount of VAT is the supplier’s responsibility, they will usually need a certificate to be issued by the care home to evidence the use of these reliefs. So, care homes should be aware of what is available to them.

Care homes operated by charities should have access to a wider range of reliefs; several VAT reliefs are available to charities in relation to the care of disabled persons and it is likely that a charity could reduce the VAT it incurs on utility bills such as gas and electric.

Privately operated homes will not have access to these same reliefs. However, there are big opportunities for savings where capital works are undertaken to either refurbish, extend / expand, or construct new residential buildings. 

Either the zero or reduced-rate of VAT can often be accessed for buildings used for “a relevant residential purpose”. N.B. Where this is applied there are some complex rules where a VAT charge can be triggered by a change of use or disposal.

Development opportunities

Our specialist VAT and Tax teams are working with several clients on development opportunities to mitigate the impact of VAT, where possible, and to maximise the recovery of tax relief through the early identification of capital allowances. 

Both of these can make a project viable and help in securing funding.

VAT risks

As the companies that operate in the care sector are generally heavily exempt, there is a high risk from inadvertent VAT leakage arising. This risk is especially high in the context of groups of care home companies that make management services or other intercompany recharges between group companies.

Such charges will generally create a taxable supply for VAT purposes. 

For example, without any mitigating factors in place (such as joint employment contracts), the recharge of a staff member’s time from one care home to another entity will usually be seen by HMRC as a taxable supply of staff. Not only does this create a registration requirement in the employing entity, but it will also create unnecessary VAT costs within the group.

It is possible to mitigate these risks by registering the group companies as a VAT Group.

Other activity in the sector

The social care sector has been buzzing with transaction activity of late with both UK and overseas investors viewing it as a long-term positive investment prospect. 

Our specialist team is currently working on a number of transactions (buy and sell), with VAT an another key area when managing the due diligence processes. If overlooked, it could lead to a deal being delayed or halted as a result of VAT issues not being managed correctly.

Contact us

If you operate in the social care sector and would like to discuss how our specialist Healthcare Team can help you, please contact Zach Annette at ZAnnette@bishopfleming.co.uk, or a member of our team and we will be more than happy to help you.