The devolution of VAT distortion

21 June 2017

The devolution of laws on social care regulation has created discrimination – in breach of EU VAT law – in the VAT treatment of private day care services providers between the different constituent parts of the United Kingdom.

A tax tribunal has determined that, whilst VAT law applies uniformly across the United Kingdom, in practice its interaction with devolved laws on social care regulation means that an identical supply of day care services in Scotland and Northern Ireland will be exempt from VAT, but the same supply in England and Wales will be subject to VAT at the standard-rate.

The distortion in VAT treatment results from the criterion adopted by the United Kingdom in applying VAT exemption to welfare services; these are that the services must be provided by a charity; a public body; or a state-regulated private welfare institution.

In Scotland day care services are regulated by the Care Inspectorate under an act of the Scottish Parliament. In Northern Ireland, such state regulation is by virtue of the Regulation & Quality Improvement Authority. In England and Wales, the equivalent regulator is the Care Quality Commission – the CQC. However, although individuals providing day care services in England and Wales are required by law to be subject to the Disclosure and Barring Service checks, day care for vulnerable adults is not regulated by the CQC.

The regulatory framework therefore means that: whereas day care service providers in Scotland and Northern Ireland can only be provided by state-regulated bodies - and therefore treated as VAT exempt - similar day care services in England and Wales can only be provided by unregulated providers; as these entities do not have the possibility of being CQC regulated, providers in England and Wales cannot qualify for VAT exemption and must charge VAT on their supplies.

Under the principal of fiscal neutrality, EU VAT law requires all private bodies providing the same services in the United Kingdom to be treated in the same manner for VAT purposes. Therefore by choosing ‘state-regulation’ as the criterion to recognise such bodies for VAT purposes, the United Kingdom has left itself open to a breach of EU VAT law.

On leaving the EU, the United Kingdom will no longer be subject to compliance with EU VAT law, but nevertheless, we simply cannot continue to have disparity between the unitary application of taxation and devolved competencies.

For more information please get in touch with David Wilson, or your usual RSM contact.