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10 May 2012
Paul Woodward, chief executive Sue Ryder

How VAT rules create an uneven playing field

In theory, the diversification of health and social care provision is a fantastic thing; in reality it is a huge challenge. Not least, according to figures in a Deloitte report produced for Sue Ryder last year, because every £10 million spent by PCTs or the NHS in outsourcing to charities could result in an additional VAT burden on the contracted organisations of £400,000.

Paul WoodwardIt’s a shocking figure isn’t it? Thanks to current legislation, the NHS can recover VAT on certain non-business supplies that charities cannot. This includes catering supplies, laundry and cleaning supplies, staff training, vehicle costs, waste disposal, maintenance and repairs.

Government policy around public service reform and the Health and Social Care Act will see charities gaining new opportunities to provide more services; it is imperative that they are able to take up this opportunity and are not financially disadvantaged as a result.

It seems perverse to have a barrier to charities' involvement in the delivery of public services when the government's rhetoric is so encouraging. I believe the government wants its big society initiative to succeed but this will only be possible if they allow charities to compete on a level playing field with the NHS.

We spent a large part of last year highlighting this inequality between the NHS and charities on VAT recovery. A recent amendment, (originally tabled by Lord Patel of Bradford and then expanded in the health and social care bill) will see the government reviewing the barriers affecting the involvement of charities, social enterprises, cooperatives and mutuals in the delivery of NHS services.

This is a significant step in creating a level playing field between the charitable and NHS sectors and gives us good hope in our drive to work closely with the government to find solutions to this problem.

Front line supportWhy are we soon keen to remove the VAT barrier? We believe that we can deliver excellent public services. Our hospices are a fantastic example of person-centred and holistic care. We want to provide this sort of care to people living with complex needs, and we believe we’re well placed to do so. There is a significant charitable element to all of our services; for our hospices this is particularly true as we provide over 50% of the funding from donations.

In addition, this is a tough time for fundraising and our donors want to know that the money they give us is going into frontline care and not to the HMRC in VAT payments.

Take this example, one of Sue Ryder’s hospices incurs £44,000 in VAT per year on non business supplies. If this service was managed by the NHS it would be able to recover 57% of this figure. These funds would allow the hospice to:

  • employ a nurse for around 44 weeks or;
  • provide 1,500 bereavement sessions for families who have lost a
    loved one or;
  • provide 2,500 hours of support from a carer.

We understand that it’s unrealistic to ask the Treasury to allow all charities to recover all VAT in the current financial climate and we’re aware the Treasury won’t be able to address the irrecoverable VAT we experience in existing services.

But we do believe we can work with the Treasury to amend legislation in a way that is agreeable to government, the charity sector and the NHS.

In principle, we wouldn’t want to see PCTs or client commissioning groups being forced to fill the ‘VAT gap’ when transferring NHS services to charities - this would make them less amenable to transferring these services. All funding available for the service transfer should be directed into supporting the delivery of care.

Similarly, we don’t believe charities should be expected to fill the ‘VAT gap’ with funds raised through voluntary donations when they could go towards the delivery of care as donors intend.

Amending the VAT system

In November the government was defeated by an amendment to the Health and Social Care Bill laid by Lord Patel of Bradford around the issue of VAT.

The wording of the amendment, relating to equality of provision, is:
“In exercising functions in relation to the Health Service, the Secretary of State must have regard to the need to promote equality for those providing services on behalf of the health service and shall within one year of passing this Act, lay a report before Parliament on the treatment for Value Added Tax of supplies by charities to bodies exercising functions on behalf of a Minister of the Crown of healthcare services or associated goods.”

We have worked with Deloitte and the Treasury to produce a workable interim solution to this problem which would bring charities and the NHS onto a level playing field in relation to VAT for all future transfers, so is cost neutral to the Treasury. It is also similar to legislation passed by this government around academy schools and VAT. These ideas can be revisited once we have a clearer idea of what the post-reform NHS landscape will look like.

So what next? As mentioned, the government has set up a Fair Playing Field Review as a direct result of the amendment tabled by Lord Patel with our support. It will report within a year and look into this issue and others that affect charities, social enterprises and mutuals’ ability to provide NHS services.

Once that review’s findings are published, we hope the Treasury and Department of Health can, with our support and involvement, work together to improve the barriers in care provision. Only then can VAT money be recouped and ploughed back into frontline services.

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