VAT ruling hits elderly care homes

A VAT tribunal ruling that will send care bills for the elderly and mentally ill soaring by 17.5% is set to be ignored by Customs & Excise because it would leave Government plans to expand the private healthcare industry in tatters.

The ruling strips ‘sole traders and partnerships’ who provide residential care of their ability to claim VAT exemption. If sanctioned, small care providers will be forced to charge clients VAT at the standard rate.

Leading healthcare analysts Laing & Buisson said about a third of care homes would be affected and could add over u100m in VAT bills. ‘Care homes’ margins would be wiped out. They would be dead,’ said the firm’s director William Laing.

Moreover, the decision would jeopardise plans by the Department of Health, outlined at the weekend through a series of Whitehall leaks, to offer u8bn-worth of social services contracts to the private sector.

Barry Hartley, vice chairman of the National Care Home Association, said they wanted to increase the amount of people in care, ‘but we can’t do what the Government wants us to do if it hammers us on the head’.

But Accountancy Age has learned that Customs plans to ignore the ruling when it issues guidance at the end of this month – the first time it has ignored a ruling in over four years. Customs will issue a statement informing accountants and their clients that their VAT exemption remains, insiders said.

Customs has been prevented from appealing against the ruling because the VAT tribunal was based on a European Court of Justice decision in the case of Bulthuis-Griffioen, which sets a precedence in case law. But according to Ernst & Young VAT partner Peter Jenkins, all EC member countries are unhappy with the EC judgment. ‘They are saying they won’t be enforcing European law, which means that care homes can remain exempt or opt to be VAT-registered.’

Steve Goodridge, VAT Partner at Oxford-based accountants Critchleys, responded: ‘It is not good enough to say this question will go away. Tax should be certain and at the moment it is not.’

Labour social services spokeswoman Ann Coffey said it had caused confusion for both purchasers and providers. ‘The Government should clarify the situation as soon as possible.’

The ruling was made last March following an appeal by Robert Kaul, owner of Alpha Care Homes, in Bromley, Kent. Unlike most care homes, he was registered for VAT. He wanted to retain registration to claim back VAT on his capital investments. The appeal decided only ‘legal bodies’ such as limited companies should be exempt, whereas ‘natural persons’ should register. Since then Customs has left care home providers in limbo.

Customs said this week that the ruling was ‘unworkable’ and it had spent the last 10 months considering the judgment. A spokesman claimed it overturned UK and EC legislation which aimed to exempt all care services from VAT.

He said guidance would be issued by the end of this month, but did not say how Customs would interpret the judgment.