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Steve Allen, Director of VAT Advisers Ltd, provides a VAT tip for owners of residential care homes.

Introduction

Historically, care services supplied in residential care homes were always treated as being exempt from VAT.  However, several years ago, this treatment was challenged by the Kingscrest Care Group, who wanted to register for VAT in order to reclaim substantial amounts of VAT incurred on capital expenditure costs. The challenge ended up in the European Court , which ruled in Kingcrest’s favour by stating that UK law did not exempt care provided in residential homes that were not registered for the provision of nursing care.

Retrospective VAT Registration to Reclaim VAT

As such, residential homes can now choose to retrospectively register for VAT (it is not compulsory). HMRC changed the law with effect from 21.3.02, so that all residential care was exempt from VAT.  However, the opportunity remains for a VAT reclaim from the start of trading right up to 21.3.02.  This could be all the way back to the start of VAT on 1.4.73 if trading began before then. The VAT registration would be in the name of the legal entity owning the business, (e.g. sole trader, partnership, or limited company), and would cover all the business activities. If more than one qualifying home is operated by the business, one VAT registration would cover them all). Homes that have been sold before or after 21.3.02 can also apply for registration under these provisions.

Homes can reclaim the VAT incurred on normal running costs, and any capital expenditure, including building work.  Unfortunately, nursing homes do not qualify under this ruling, but homes providing both residential and nursing care could also benefit from the ruling provided the nursing beds are no more than 50% of all beds. However, full recovery of VAT on the expenditure of the business is unlikely in these particular cases, as some restriction would have to be made to take account of the VAT exempt nursing care.

In practice, not every residential care home which contacts us finds that they have a potential refund – some find that they would owe VAT to HMRC if they registered!  A lot depends on the levels of capital expenditure and the percentage of occupants whose fees are paid by local authorities.

Conclusion

In summary, if you own, or used to own, a residential care home where there is some capital expenditure and a good ratio of council-funded occupants, you may well be entitled to a VAT refund (some have been six-figure amounts).

Please contact us if you think you may be an eligible care home.  We operate on a no-win-no-fee basis, with the agreed fee only being due once a refund is received. We would advise in advance, however that the claim process itself is inherently very labour-intensive, and can take up to six months or more to complete.