More providers of welfare services may now need to treat their supplies as exempt, therefore losing their ability to reclaim input VAT costs. Those affected should consider making a protective refund claim for overpaid VAT.
The change in VAT treatment follows the recent decision in the case of Life Services Ltd (LIFE) v Revenue & Customs Commissioners (First Tier. Tribunal), a provider of day care services for adults across a broad spectrum of disabilities. The organisation provides its services directly to local authorities, to individuals managing their own care budgets and to care homes.
The ruling could have ramifications for any organisation that provides welfare services, and may also affect some structures implemented by care providers in order to benefit from the addition of VAT to the services they provide.
The decision in this case potentially extends VAT exemption for welfare services wider than charities and state-regulated welfare providers. Organisations that have been charging – and recovering VAT – may no longer be able to do so.
It is often preferable for suppliers to charge VAT as this gives them the right to recover VAT on costs. Some suppliers have entered into structures where services are provided to local authorities through organisations that are neither state regulated nor charitable on the understanding that such services would be taxable. This enables the supplier to recover VAT costs, while being a VAT neutral outcome for the local authority.
The outcome of the LIFE case indicates that this arrangement may not work, as exemption could apply to all services regardless of the status of the supplier.
The LIFE case
Under the provisions of Item 9 Group 7 Schedule 9 VAT Act 1994, VAT exemption applies to the supply of welfare services by a charity, a state-regulated private welfare institution (or agency), or a public body. Note 8 explains that “state regulated” means “approved, licensed, registered or exempted from registration by any Minister or other authority…”
LIFE is neither a charity, nor regulated by the Health and Social Care Act 2008. However, the organisation argued that, because it was not required to be registered under the Health and Social Care Act, it should be seen as exempted from registration. Therefore its services should be exempt from VAT. However, the Court considered that, while the company was not required to be registered, neither was it exempted from registration. As a result, LIFE was not state regulated and therefore LIFE’s services should have been subject to VAT at the standard rate according to the UK legislation.
This may not be an issue to businesses providing services to local authorities because the authorities can recover VAT charged as input tax. However, it could impact suppliers providing services to care homes or to individuals for whom VAT is an absolute cost. For these customers, it’s better if services are exempt from VAT. It therefore seems that the move to personal budgets has had a detrimental and possibly unintended VAT consequence.
However, this is not the end of the LIFE story. The Court ultimately found for LIFE on the grounds that charging VAT was contrary to the principle of fiscal neutrality, which is a principle of interpretation applied to EU VAT law. Essentially, the same service should not have different tax treatments if supplied by different providers unless this result is clearly intended in the EU legislation.
The Court decided that it was wrong, in this case, for identical services to be treated differently and the services of LIFE could be VAT exempt. It concluded that the UK legislation was wrong and item 9 Group 7 Schedule 9 VAT Act 1994 breached the principle of fiscal neutrality. As a result, LIFE’s supplies of welfare services were to be regarded as exempt.
Take action now
Any organisation that currently charges VAT on the welfare services that they supply should review their position as soon as possible. It may be that these services should now be treated as exempt. However, there may be scope for making protective refund claims.
Organisations that have entered into a planning arrangement to make their supplies taxable also need to revisit these arrangements in the light of the LIFE case.
For more information, please do get in touch.