The Learning Centre Romford – the VAT Welfare Exemption
In June the VAT Tribunal published its decision as the VAT liability of welfare supplies made by the Learning Centre Romford. This was not a charity but a limited company that provided care for vulnerable adults. This care was funded by local authority money.
The issue the Tribunal had to consider was whether the supply made by the company was VAT exempt under the VAT welfare exemption or taxable. As the company was not a Charity, to be covered by the welfare exemption UK legislation required it to be state regulated. It was HMRC’s view that as English law does not directly regulate the type of care provided by the company it’s supply was not exempt but standard rated.
The Tribunal rejected the Company’s arguments that it was in fact state regulated because of statutory requirements to use vetted staff and that the fact its main local authority competitor was in a better VAT position meant there was a ‘fiscal neutrality’ issue – because this inequality was intended in the legislation.
But the Tribunal did find for the Company. It’s reason was that in Scotland such work is state regulated and since the UK is one VAT system it would be wrong for UK based providers of services to be treated differently. It was a decision founded on the principles of EU law and I suspect will be appealed, although the reasoning of the Tribunal appears quite sound to me. Of course when we do leave the UK and if the leave deal allows the UK to alter the VAT rules without EU interference, then one assumes HMRC can seek to change the law to create a VAT system where VAT liability in Scotland can differ from England. But if you concede the principle of universal VAT liabilities and agree care can have a different VAT liability in Scotland then why can’t books or private schools. I wonder if ministers really want this ?
The case happened because of the shift to individual budgets. The type of vulnerable adult care we are dealing with here used to be paid for directly by the local authorities – they commissioned the service, received a bill and then paid for it. In such a situation if VAT is chargeable then the local authority can recover it as it relates to their statutory obligations. But with individual budgets the care supply is regarded as being made directly to the vulnerable individual and neither they or the local authority can recover the VAT. From the care providers perspective making the supply exempt is clearly a sub optimal outcome as it means they suffer a VAT recovery restriction. They are worse off than they would be making a taxable supply to the local authority but not as worse off as they perceive they would be charging VAT that cannot be recovered.
In this case the money to pay for the care was provided to the individual and had to be held in a separate account and only used to pay for approved care; at the end of the year any unspent money reverted to the local authority. In these circumstances, with the use of the money so fettered, the Tribunal made a final observation that there was an argument that the supply was not really made to the vulnerable person receiving care but the local authority. As this point it hadn’t been argued the Tribunal couldn’t decide upon it. Although I understand this reasoning it seems rather unsatisfactory. This was a lead case and lots of similar organisations are depending on their VAT position being clarified. The final comment appears almost like a final twist in a detective novel that challenges all you have read before.
What I find annoying is that this case needed to be taken at all as it seems to me an example of Government failure. The reason the Dept of Health and other parts of Government have encouraged personal budgets is to empower the recipients of services. If they have a say over who is providing their care then this will improve the care – or so the argument goes.
But it must surely be possible to achieve this policy objective without creating a VAT cost. What have now is a situation where local authorities get less care for their money than before. Since their real income is being constantly cut this might even result in a reduction in the amount of care provided. If the case goes before a higher Court and a precedent is created that means that the exemption applies to all such supplies then it could mean that supplies made directly to local authorities are now also exempt and other suppliers will lose out. It’ s a mess. It’s also a mess that could have been avoided- had HMRC and the other Departments worked out a solution that allowed VAT to be recovered and the tax take to remain the same.
One option would have been for them to have agreed a structure that satisfied HMRC that the supply continued to be made to local authorities and yet still allowed choice for the vulnerable adults. Another option would be for a Section 33 refund scheme similar to that agreed to the hospices. I was heavily involved in discussion over the hospice scheme and suspect the obstacle here would be the Treasury’s refusal to accept that such refunds are allowed for exempt rather than non business activities. But I believe a solution was and is possible and it is surely HMRC’s role to try and find it. Assuming of course they have any staffing resource at HQ level that is not concerned with Brexit.
The decision can be found here