Under the joint governance arrangements defined in section 75 of the National Health Service Act 2006 (the ‘Act’) NHS bodies and Local Authorities are permitted to establish and maintain a pooled service fund. The purpose, and an overriding requirement, is to improve the delivery of health-related services. In fact, the implementation of the continuing Better Care Fund plans is dependent upon there being an appropriate section 75 agreement in place.
Under the partnership arrangements, parties may choose to effectively delegate excise of their functions over to a ‘lead’ partner. The purpose of this entirely sensible provision is to encourage the NHS and local government organisations to work more cohesively to improve the quality of service delivery for the user and to mitigate any duplication of community care costs.
This is all well and good, but unfortunately the tax position combined with the principles of agency, can often be complex. It is now a area of HMRC focus with a recent letter campaign launched by HMRC’s public bodies group. We have been saying this for a few years but there is a very real risk of sizeable HMRC tax assessments now looming in the sector.
Firstly, it is important to note that local authorities are generally entitled to a full refund of their VAT costs, whereas NHS bodies including CCGs, fall under a different VAT regime and have a more restrictive system with much lower VAT recovery. Taking this into consideration, local authorities should be able to commission or deliver services without any ‘sticking’ VAT costs. There are historic reasons for this difference which we do not need to dwell on at this stage.
So, if we take a plain vanilla example of where an NHS body delegates its functions and funding over to a local authority partner, there can be a large VAT saving so long as the primary driver was to improve health services. This is because the local authority partner, as fund holder and in excise of the delegated functions, finds that the VAT incurred falls within their own VAT regime and is fully recoverable.
For a long time, use of the pooled fund provisions used by NHS and council organisations was often only for community equipment used by both NHS community and social care teams. The sector operated on the understanding that the transfer of funds pursuant to a section 75 agreement is always outside the scope of VAT and this belief largely continues irrespective to the type of arrangement at hand.
However, over the last five years the health landscape has evolved considerably. CCGs are now responsible for commissioning health services from the NHS Trusts, councils, non-profit and for-profit providers. We also have formal Health and Wellbeing boards charged with integrating services. Public health funds now sit with local authorities and there has been a renewed enthusiasm from central government for CCGs and local authorities to jointly commission services, including under the Better Care Fund programme.
As a result, interlinked with control and politics, many agreements now include a long shopping list of public care services, differing lead bodies for each, the concept of joint commissioning, aligned budgets and integrated care. A single agreement can often involve numerous CCGs and one local authority partner. There is a wide variety of agreements, a mix of leads and providers, lots of funds passing back and forth and organisations lending their resources to other partners.
We believe most NHS and local authority partners have not considered, or simply assumed, that there are no VAT consequences to their own arrangements. Others have sought to rely on the last HMRC guidance note written way back in 2003 even though this excludes joint commissioning.
Even CIPFA guidance can be unreliable. A recent VAT tribunal (TC05803) for a Health Watch body disagreed with both CIPFA’s and HMRC’s opinion of “let’s call it funding” with the monies passing from the council determined as a payment for a business supply and subject to VAT.
For practical examples download the full report.