By Robert Marchant, head of corporate VAT at audit, tax, risk and advisory firm Crowe (www.crowe.com)
“Plus VAT”, are two small words that can add a further 20% of costs to a care home’s operating costs, and have a considerable impact on budgets.
As the provision of welfare services is largely exempt from VAT, many care homes, whether they are operating on a ‘for profit or ‘not for profit’ basis are not registered for VAT, or if they are, they can only reclaim a small percentage of the VAT they incur. There are several steps that care home operators can take to better manage their VAT positions and to increase the amount of VAT they can reclaim.
The first step is a simple one in that no organisation can reclaim VAT without first being registered for VAT, so the first action is to assess whether the organisation makes taxable supplies that enable it to voluntarily register for VAT (note that if taxable income exceeds the compulsory VAT registration threshold, currently £85,000 per annum, then VAT registration is a legal requirement).
Once registered for VAT, consideration should be given to ‘how much’ VAT can be reclaimed, specifically, what VAT is incurred on costs that relate to taxable income – typical examples of taxable supplies in a care home setting include café/restaurant income, shop and transport services – and the VAT recovery calculation. There are some complex recovery rules known as partial exemption which provide for VAT incurred on costs directly relating to taxable income to be reclaimed, as well as a percentage of general overhead costs. It can therefore be advantageous for care homes to register for VAT, if possible, to benefit from these two elements of VAT recovery. They are unlikely to result in significant cash repayments given the principal activities of a care home remains VAT exempt welfare services but they are repayments to which the organisation is entitled, provided it satisfies the appropriate VAT compliance requirements. A point to note is that, in our experience, many care home operators do not keep records of the VAT they incur (simply treating any cost with VAT as a gross expense) so registering for VAT to benefit from reclaims would require a change to these processes, as well as the obligation to prepare and file VAT returns on a regular basis.
SIGNIFICANT VAT REFUNDS OPPORTUNITY
A much more significant change, and one which could result in significant VAT refunds, is to ‘break’ exemption so that the care home’s principal activities of welfare are subject to VAT. This would only be attractive where the customer is not self-funding their care home costs (as charging VAT to a private individual would make the service 20% more expensive); in many instances the services are provided to entities that could recover VAT if it were properly chargeable, e.g. local authorities and NHS Trusts. The conditions for VAT exemption are applied narrowly and if one or more requirement is not met, VAT exemption does not apply and the care home services default to being subject to VAT. By taking steps to charge VAT (which the local authorities and NHS Trusts can reclaim) the operator is able to recover the VAT it incurs on associated costs. Organisations with a mixture of both self-funding and local authority funded residents are also able to benefit from these arrangements; they do not require the care home to solely have residents funded by local authorities/NHS Trusts.
There are a number of actions that need to be taken to implement such a change and it does require an amendment to the legal entity providing the services and the contractual terms with the counter parties. Taking steps to fall outside the VAT exemption may at first seem counter intuitive, but it is an action that a number of care homes providing welfare services to local authorities and NHS Trusts have done and it can yield significant VAT savings when the changes are implemented correctly.