Hospices can obtain zero rating under two provisions in the VAT legislation.

The first zero rates the construction of a new building intended to be used for a non business charitable purpose. HMRC allow charities to undertake a small amount of business activity (up to 5%) and still qualify for the relief. If your business use is over this then you cannot get zero rating and if you have previously qualified for zero rating you may have to refund some of the VAT you previously saved.

The meaning of business for VAT purpose is, rather oddly for something so fundamental to the tax, a subject on which there is still much debate. However, the normal position adopted by HMRC is that if a charity makes supplies in return for a payment that it will be in business. This in turn means that the VAT treatment of hospice funding is critical. If the money provided to hospices by NHS bodies is regarded as payment for a supply of exempt medical services then a hospice will be in business and not qualify for the non business zero rating. If alternativly the money is regarded as outside the scope of VAT by HMRC then a hospice will not be in business and there is no problem with the zero rate. At the moment HMRC central policy is that they are willing to see hospice core funding agreements as outside the scope of VAT.

Where the problem arises is in respect of patient specific funding such as continuing care funding and individual budget holder funding. At the moment the main hospices affected by these funding streams are children’s hospices but it seems likely that similar patient specific funding will be extended into adult palliative care. HMRC have difficulty in seeing such funding as not being payment for a supply. Agreements are continuing in this area as even if there is a supply it need not be made in the course of business.
The second route to the zero rate is the provision that relives the construction of ‘a hospice’. Here HMRC policy is to restrict the application of the zero rate to residential hospices and require an apportionment if the new building will be used in part for outpatients. Whether this HMRC restriction is appropriate is a question that has been raised centrally with HMRC. There is a logic behind it in terms of European law but there is a strong case that the term Hospice should be given its natural meaning which must incorporate some outpatient work. Hopefully there will be a response in the new year.