How much do you know about the VAT welfare exemption?
With more and more public bodies outsourcing the provision of welfare services, this question becomes increasingly relevant to an ever wider circle of those advising SMEs and smaller charities. Take a short quiz to test your knowledge. Which of the following would be VAT exempt?
- The services provided by a charity at a residential home.
- The services provided by a private company at a nursing home regulated by the Care Quality Commission (“CQC”).
- Domiciliary services provided for disabled individuals by a CQC regulated private company.
- Domiciliary services provided by a charity for elderly people.
- Adult community support services provided by a charity.
- Adult community support services provided for young people with learning difficulties by a private company (or even a community interest company) and approved by a local authority.
Only the first five categories above would be VAT exempt. HMRC would be likely to regard the services at 6 as taxable because they fall outside the terms of the VAT exemption.
This can be a serious matter if the private company in question is unaware of this apparent anomaly. If such a company fails to register for VAT at the correct time, the penalties could be substantial. While the person paying for the services (such as a local authority) may be prepared to pay the bill for VAT arrears, it is highly unlikely that they would accept responsibility for a penalty for failure to notify.
The source of the problem
The anomaly arises because the CQC does not currently have any jurisdiction over adult community support services; in HMRC’s view nobody else does either. In other words, according to HMRC, businesses that collect and return vulnerable individuals from and to their homes, and care for them during the day, are wholly unregulated. How can this be? While local authorities have been allowed for decades to outsource these services, in practice this did not happen until after the CQC was set up. That is why there is a gap in the CQC’s jurisdiction. The need to regulate such services was not apparent.
Welfare services may be VAT exempt when provided by a public body, a charity or by a state-regulated private welfare institution or agency. “State-regulated” is defined as “approved, licensed, registered or exempted from registration by … any authority pursuant to a provision of a public general Act”. Care provided in somebody’s own home or in an institution is regulated by the CQC. This does not apply to those who provide very similar care in the community. But the providers of adult community welfare services must be “approved” by local authorities to operate. Otherwise it is highly unlikely that the disabled persons to whom they offer their services could use their personal budgets to purchase those services. Nonetheless, HMRC does not accept that local authority approval under the Chronically Sick & Disabled Persons Act 1970 amounts to state regulation. Admittedly HMRC has an understandable conceptual difficulty with a customer also being a regulator. But local authorities are often exceptions to rules (including VAT rules), and it seems barmy that these sorts of services should be subject to VAT.
Never assume anything with VAT; make sure none of your clients sits unwittingly on the wrong side of any regulation or other condition relevant to a VAT exemption.