A tribunal has ruled that fees charged by private operators of adult day care centres in England and Wales are exempt from VAT under EU law. Day care providers throughout the UK should review their VAT position.
The welfare exemption
Under UK law, welfare services are exempt from VAT where the provider is a public body, a charity or a ‘state regulated’ private entity.
HMRC accepts that private providers who are regulated by the Care Quality Commission in England, the Care and Social Services Inspectorate in Wales, the Care Inspectorate in Scotland or the Regulation & Quality improvement Authority in Northern Ireland are state regulated for this purpose.
Day care centres for adults are subject to such regulation in Scotland and Northern Ireland so their fees are exempt. However, the regulatory bodies in England and Wales do not cover adult day care provided outside the client’s home or residential care home. Therefore, private day care centres for adults in England and Wales are not eligible for the exemption under UK law so must charge VAT on their fees.
The Learning Centre (Romford) Case
The Learning Centre, a private company, operates a day care centre for vulnerable adults in the London Borough of Havering.
Day care of vulnerable adults in the borough was the responsibility of the local authority, which contracted out its obligation to private sector operators, including The Learning Centre. Under this arrangement, the local authority paid funds to the service user’s parent or carer who would in turn pay fees to The Learning Centre for the day care it provided. Therefore, in this instance the recipient of the supply was unable to recover the VAT.
In a recent appeal to the First-tier Tax Tribunal, The Learning Centre successfully argued that, in allowing different VAT treatment of privately run adult day care centres according to region, the UK is in breach of European law on fiscal neutrality. Therefore, its supplies of day care were exempt from VAT by direct application of EU VAT law.
What does this decision mean for other providers?
HMRC has yet to make a statement on this case and may appeal the decision to the Upper Tribunal. It has already appealed against a similar finding in another VAT appeal brought by Life Services so, in the short team at least, is unlikely to concede that the exemption applies. The position could be further complicated by the UK’s impending departure from the EU.
It should also be noted that the tribunal’s finding may not be good news for all providers of adult day care. The Learning Centre was required to keep its fees in line with those charged by local authority day care centres in the borough so, in this case, the VAT it was forced to account for to HMRC was an absolute cost for the company. However, other providers whose fees are not restricted in this way may find exemption worsens their VAT position because they will no longer be able to recover all the VAT they incur on costs related to their day care activities.
Direct payments - a final aside
The tribunal judge also questioned another aspect of the current application of VAT to private day care services.
The local authority applied strict conditions to the use of the money given to parents and carers to fund the day care. This could only be used to pay The Learning Centre and had to be kept in a separate account with any unused funds returned to the local authority.
The judge wondered if these conditions effectively meant that the local authority was the true recipient of The Learning Centre’s services. Unlike a parent or carer, a local authority would - if the tribunal’s judgment was incorrect and VAT was due - be entitled to recover any VAT charged. Therefore, its fees could be valued net of VAT, rather than on the current VAT inclusive basis, which meant VAT was an absolute cost to the care provider.
However, as its finding in favour of The Learning Centre on the exemption argument was enough to decide the appeal, the tribunal did not make a firm finding on the direct payments point. Given that such funding arrangements are commonly used between local authorities and care providers, it will be interesting to see if this issue will resurface in any subsequent litigation.
Your next steps
Providers of adult day care centres throughout the UK should review their VAT position and watch out for further developments arising from this litigation.