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VAT restructuring for social care providers– how it works

Many social care providers have been disadvantaged by their VAT-exempt status in that

they have been unable to claim back VAT paid for their operating costs. However, by assigning contractual responsibilities to a non-regulated associated VAT group member, a care provider is enabled to claim back VAT for costs associated with providing care for a publicly funded individual.


In essence, this means a commissioning or funding body agrees to contract with a

non-regulated entity which then subcontracts the care services to an associated registered and regulated social care provider. The legal basis for this is that the Care Act 2014 does not compel public funders to contract with regulated entities and so the charging for social care services falls outside the VAT exemption provided in Group 7, Schedule 9 of the VAT Act 1994. This legislative basis was originally used by public funders (local authorities and CCGs) to engage care providers in fee negotiations in return for trading terms which were standard rated for VAT purposes as opposed

to exempt. Now established VAT practice in the sector, these arrangements have existed for around eight years and are undertaken with HMRC approvals in place.


A cardinal concern for commissioning bodies has been the contracting to procure social care services from non-regulated entities. Public funders do not lose their key relationship with the care provider; all the rights and powers of the funder remain and the funder’s ability to act, where necessary, remains unchanged. Of further concern are the possible implications were HMRC to change their position in respect of these arrangements in the future.


While HMRC does have the right to change VAT rules from time to time, any change to these arrangements for VAT recovery by HMRC would require legislative change and the reality is that these arrangements have been in place for close to a decade and HMRC’s involvement is now mainly to do with the practical operation of correct invoicing, accurate input tax recovery and the correct application of the partial exemption rules.


Once approval in principle has been agreed for these arrangements between a commissioning body and the non-regulated contracting arm of the regulated provider organisation, Kieran Lynch writes to HMRC with full disclosure of the client, their proposed VAT group, their accounts, etc and seek HMRC approval for the purposes of restructuring their welfare services. This provides reassurance for the contracting partners that the principle of legal certainty is in place and that HMRC has

approved the arrangements.


The benefits of VAT restructuring in the commissioning and provision of publicly funded social care services are that, while they are cost-neutral to the funding body (and offer the potential for funder fee generation), the arrangements nevertheless help support care provider viability by sustaining provider cashflow. By acting to counterbalance the effect of void payments coming to an end, VAT restructuring in respect of publicly funded services places the care sector in a stronger position to deliver these services and helps providers with their staff recruitment and retention challenges.


For more information please get in touch.

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