Date of issue: 14th March 2005

CARE HOMES CAN BACKDATE VAT REGISTRATION TO REDUCE OVERHEADS

Despite a change in the law which has prevented residential care homes from treating their supplies as standard rated for VAT purposes since 2002, there is a possibility that they can recover input tax suffered up to that point says chartered accountants Clement Keys, Birmingham.

In a test case won on appeal, residential care home Kingscrest successfully argued that because it was a partnership it was not covered by the exemption for healthcare under UK legislation and as a result its services must be standard rated.

Since its clients were Local Authorities who could reclaim the VAT on fees, Kingscrest could pass on the VAT chargeable to the relevant Local Authority and recover the input tax on its running costs.

As a result of the case, new legislation was brought into effect on 21 March 2002 making it clear that the provision of care in a residential home was exempt from VAT. .

However, Clement Keys says there is no reason why the operators of a residential home cannot decide that it was making standard rated supplies up to 21 March 2002 and benefit from a reduction in their overheads up to the time the law was amended.

"Care homes which are interested in pursuing this opportunity will need to make a backdated application to register for VAT," says Steven Simmonds, director of VAT services at Clement Keys, Birmingham.

Local Authority clients will have to be informed that the proprietors of a residential home propose to raise a VAT only invoice for the VAT which would have been due up to 21 March 2002. If they will accept this - because in most cases councils will be able to reclaim the sum from Customs - the business can proceed with its backdated VAT registration.

"It's important to point out that not all residential care homes are fully funded by Local Authorities of course - many also have private individuals as clients who pay their own fees," adds Steve.

"Care homes are entitled to treat the income they receive from private individuals as exempt from VAT, but they need to be aware this could restrict the amount of VAT they can reclaim on their expenses.

"Businesses should seek professional advice on this matter because there is a significant amount of work involved in backdating an application for VAT registration and there is also a need to ensure that the exercise is cost effective."