In the recent Autumn Statement the Chancellor announced he would be introducing a VAT refund for Hospices. As a VAT advisor to Hospice UK I have been involved in the discussions to date. I must stress that what follows is my personal view.

The introduction of a VAT refund for hospices was one of the recommendations of the Monitor ‘Fair Playing Field’ review which reported in March 2013. This found that the current rules which allowed organisations the were part of the NHS divisional VAT registration to recover VAT but prevented hospices from recovering the same, led to a distortion. The recommendation was that the NHS rules be extended. NHS bodies cannot recover all the VAT they incur but are able to recover VAT incurred on some Outsourced Services. These are services (not goods note) that are used for a non business activity and could be provided in house. The rules date back to the Thatcher era and introduced because public sector privatisation and outsourcing were being prevented by contractors charging VAT that was irrecoverable. The Contracted Out Service (COS) system works by listing under COS headings services where recovery is permitted. There are dozens of such headings and NHS bodies, or more often their advisors, make claims by trawling through invoices and comparing what is on the invoice to a COS heading description. It is in my view a rather daft and over complex system. It is not one I would wish to see replicated for hospices which in my experience have enough difficulty with VAT administration as it is. The form that the refund will take is still being discussed. There are a number of options. The first would be for hospices to make claims for VAT recovery using the same procedure as that used under the COS rules with these claims being administered either by HMRC or a third party such as Hospice UK. This seems rather unattractive because of the complexity I mention above. A second would be for there to be a grant paid to hospices to compensate for the lost VAT. This could again be administered and paid over by a third party and have far simpler rules than the full COS system. The problem here is that grants can be reduced. In this context the churches and war memorial VAT refund mechanism provides a cautionary warning. When this refund was introduced under the last Government it provided for full VAT recovery for eligible projects. But it is now limited to a fixed amount and if that budget is exceeded then claims are reduced accordingly. In a year where there are few other claimants you will get a higher percentage recovery than in a year with lots of other projects. This is all rather unsatisfactory if you are preparing a budget or fund-raising. A third option has been discussed of including hospices within a new section 33 – the refund mechanism applied to local authorities, museums and academy schools. This potentially allows greater VAT recovery than the COS rules and could apply to goods as well as services not allowed under COS such as new build construction services. Although this is clearly attractive, there are a few obstacles that would need to be resolved. One of these is that changes to the structure of NHS hospice funding in England (not Scotland and Wales yet) mean that hospices are increasingly undertaking work under contract. This implies they may be in business making VAT exempt supplies for VAT purposes which causes a problem for the Treasury who do not accept that section 33 refunds are possible for VAT exempt activities. A particular problem area here is the VAT treatment of Continuing Care funding where named individuals receive specified care. Whichever option is chosen it is likely to take effect from 1 April 2015. Negotiations will start in the new year and any feedback is welcome. If you would like to be on my hospice e mail list then let me know.