The government has said it will fight a ruling by a tribunal removing the VAT exemption for services provided by care homes for the elderly, mentally ill and disabled.
The statement comes after Kingscrest, which runs two residential care homes in London, took the issue to a VAT tribunal believing it could make major costs savings by being VAT registered.
A Treasury source said: ‘We will not allow VAT to be imposed on vulnerable people in care homes. We will change the law if necessary to bring in a new exemption that protects them.’
Government sources said they did not accept the Kingscrest tribunal ruling and were ready to appeal to the High Court.
The Kingscrest move comes at a difficult time for government as it attempts to deliver on promises to improve public services using the private sector.
Care homes, too, are going through a sea change with drives to update their image and modernise services. Cosgrove Care, for instance, winners of the disabled category of the Charity Awards 2001, has transformed itself from a paternalistic organisation to one which supports its clients to live fully independent lives within the community.
Currently, Customs regards such homes as VAT exempt under a European Union ruling that states they provide hospital, medical and closely related care.
But Kingscrest, which runs homes for adults and children with Downs Syndrome, challenged this ruling in the hope that VAT registration would lead to a major cut in costs and consequent increase in profits.
Deloitte & Touche VAT partner John Kennedy said that the tribunal’s decision could affect other care homes but the decision was not binding.
Any legal tussle could take years, and even if Kingscrest wins it does not necessarily follow that the ruling will catch all residential care providers who make a profit. That would require a further test in the courts also possibly taking years.
Customs & Excise stated it had no plans to impose VAT on care homes and doubted whether there would be a queue of institutions seeking VAT registration.
After all, if they could save money by doing so, they would absorb the VAT costs by internal accounting.
Customs added that if there was a chance the Kingscrest decision could affect the entire residential care sector, the law could be changed to bring in a new exemption protecting businesses from VAT.
Sources said the current EU exemption was intended to protect the sector from VAT so objections are unlikely from Europe if such a course of action was taken.
The prime minister’s official spokesman supported the Treasury line saying the government would not allow the residential care sector to become liable to VAT.