The Care Act and VAT – an unintended consequence?

Is your care organisation about to be hit with an unexpected VAT bill?

The Care Act 2014 brought in some unexpected changes which mean that carer support charities which have ‘service level agreements’ (SLAs) with local councils could end up becoming liable for Value Added Tax (VAT) on elements of support which they provide to their carers.

Certain preventative services which were previously classed as non-statutory services are now, under the 2014 Act, classed as statutory and could potentially attract VAT (which it didn’t previously). This means big VAT bills for some organisations – VAT that many will be ill prepared to pay.

So, what are the specifics of this change? And how is it likely to impact on your non-for-profit organisation?

What’s the big change?

Statutory services being delivered by a Carer’s Centre need to clearly fall within the descriptions of welfare services, as set out in HMRC’s VAT notice 701/2**, to be acknowledged as exempt from VAT.  

In a recent ruling for one of our clients, HMRC has stated that this is not necessarily the case with services provided to carers. It is their view that some services might not be welfare services but could be more akin to a management and support service for carers in general.

The resulting effect is that the SLA, being in substance a contract for services, is viewed as a taxable business supply – either in part or as a whole.

How these changes affect carer support organisation? 

Let’s assume that a Carers’ Centre was contracted to provide statutory services at 1 April 2015 (the date that the Care Act came into force). Should contract values exceed the VAT registration threshold (£83,000 at the time of writing) and the services provided not qualify under the relevant welfare exemptions, HMRC could request that a retrospective registration for VAT from 1 April 2015 is undertaken.

This would have the effect of a Centre becoming liable to VAT at the standard rate on some (or all) of its Service Level Agreement(s) in place from 1 April 2015. This is in addition to the penalties for late submission of returns and late payment of taxes which would then be levied.

It’s not difficult to imagine the potential detrimental impact of this on a small charity’s free reserves, not to mention the administrative burden of retrospective VAT liability and partial exemption calculations!

Next steps 

If you think that your organisation could be affected by the above we would encourage you to take the following first steps:

  • Speak with your accountant or professional advisors
  • Review any SLAs in conjunction with VAT Notice 701/2, Section 9 – are there any elements which might not fall within the scope of the welfare exemptions it has set out?
  • Speak to your local authority to ascertain whether they would be willing to cover any VAT liability arising on existing contracts – perhaps mitigating the need for you to fund any potential liability from free reserves

Of course there is always the temptation to adopt Ostrich behaviour, ignoring any potential issue in the hope that HMRC won’t come knocking. However, a proactive approach to exploring any potential impact on your organisation not only demonstrates good governance, but we are a firm believer of being forewarned and forearmed.

Plans to reform the legislation

It is our view that this is an unintended consequence of the Care Act. The potential (some might say punitive) implications for the Sector, specifically with regard to the taxable status of local authority contracts for charitable service providers, do not appear to have been thought through to their ultimate conclusion.

As a corporate member of the CFG we have raised this matter with their Head of Policy and Public Affairs, with the objective of lobbying for a change in the legislation. However, we need to hear from other organisations that may be impacted by the changes.

Get in touch with GFC’s Managing Director, Jen Gerrard directly (jen@gerrardfc.co.uk) to explore how you could support the movement for reform. We look forward to hearing from you.

** Further guidance can be found under Item 9, Group 7, Schedule 9 of the VAT Act 1994