Health and social care integration: finance guidance

5 VAT

5.1 Revenue

5.1.1 A written submission was made to HMRC seeking confirmation that the Integration Joint Board would have no requirement to register for VAT under the VAT Act 1994. HMRC have confirmed in writing that there is no VAT registration requirement for the Integration Joint Board. This is on the basis that the Integration Joint Board is not delivering any supplies that fall within the scope of VAT and as there is no consideration received by the Integration Joint Board for the production of the plan this will not alter the VAT registration position.

Will there be VAT leakage if the Integration Joint Board changes the balance of services through the Strategic Plan?

5.1.2 Yes; the Integration Joint Board, Local Authority and Health Board should be aware that, due to their different VAT status, the total VAT reclaimed by them will change over time as the profile of services provided by the Health Board and Local Authority respectively, changes in line with the Strategic Plan. There are two cases to consider:

• The Integration Joint Board directs a shift in spend that results in the Health Board and Local Authority spending more/less on the services they already deliver (i.e. the Health Board on health functions and the Local Authority on social care functions). In this case, the Health Board and Local Authority will recover VAT on their supplies in the usual way, which may result in an overall VAT leakage or a VAT gain depending on the direction of the shift in spend.

• The Integration Joint Board directs the Health Board to provide some social care functions and/or the Local Authority to provide some health care functions. In this case the Health Board and Local Authority should recover VAT using the method set out Section C 5.1.1.

What will be the VAT status of the Integration Joint Board if it is empowered to provide services?

5.1.5 HMRC have confirmed that the Integration Joint Board may effectively ignore their independent VAT status and be treated as lead agents on behalf of the Local Authority or Health Board as principals. This scenario would effectively replicate the VAT solution for delegation between partners, (but with the Integration Joint Boards as the host body and the Local Authority and Health Board as delegating partners) and the method set out at section C 5.1.1 should be used to recover VAT.

5.1.6 This outcome should ensure a VAT neutral position.

5.1.7 It is not expected that the Integration Joint Board would have any need to VAT register as it will be delivering services as a lead agent of the Health Board and Local Authority. However, should the Integration Joint Board receive payment for this service then the VAT registration position should be considered as it may have a compulsory obligation to register for VAT.

5.2 VAT implications associated with provision of support services to the Integration Joint Board

5.2.1 The Health Board and/or Local Authority will provide the Integration Joint Board with a range of support services in order to allow it to carry out its functions. The support services will include;

a) Provision of staff;

• Chief Officer and Chief Financial Officer employed by the Health Board or Local Authority

b) Back office support services including;

• Financial services (e.g. ledger services, member expenses and allowances)
• Financial planning and financial management services
• Planning services (e.g. data and analysis to support development of the strategic plan)
• HR advice (for the two staff)
• Communications support (to support the communication of the strategy)
• Participation and engagement facilitation (support to engage with the public)
• Administrative support (provision of accommodation, printing, records management etc)

5.2.2 Where the Local Authority/Health Board provides support services to the Integration Joint Board it will need to consider whether the transaction falls within the scope of VAT and should be treated as a 'supply' for VAT purposes.

5.2.3 The key determinant will be whether the Local Authority/Health Board receives anything from the Integration Joint Board in return for providing these services.

Supply of services in return for consideration

5.2.4 Where the Local Authority/Health Board receives payment from the Integration Joint Board in return for the provision of support services, it will be treated as making a business supply for VAT purposes. The VAT treatment of staff secondments and back office services will be as follows:

(a) Provision of Staff

5.2.5 Staff secondments are treated as a supply of staff and are usually subject to VAT, unless the supply involves;

• Secondments between and by government departments which require specialist knowledge that cannot be obtained from the private sector;
• Secondments between National Health bodies; and
• Some secondments between local authorities and by local authorities where they have a statutory obligation or monopoly.

5.2.6 The arrangements for Chief officer and Integration Joint Board financial officer are unlikely fall under the above exclusions and therefore where the Local Authority/Health Board is treated as making a supply of staff to the Integration Joint Board it will be required to account for 20% VAT on the consideration received from the Integration Joint Board. As the Integration Joint Board is not registered for VAT, the VAT charge will form an irrecoverable cost to the Integration Joint Board or may reduce the level of funding received by the Local Authority/Health Board.

5.2.7 Note that the consideration for a supply of staff does not necessarily need to be a fee but can constitute charges by the Local Authority/Health Board to the Integration Joint Board of wages, national insurance and similar employment costs it incurs while the employee is on secondment.

5.2.8 It may be possible to avoid an irrecoverable VAT cost to the Integration Joint Board through the use of joint employment contracts.

• This arrangement involves the Chief Officer and Integration Joint Board financial officer being employed under a joint contract of employment with the Local Authority/Health Board and Integration Joint Board. HMRC accept that where an individual is jointly employed by two parties, it is not possible for one of the employers to make a taxable supply of the staff to the other, even where it may charge part of the wages/costs of the staff to the other party. Where the members of staff are employed under a joint employment contract, any payment made by the Integration Joint Board (to either the Local Authority/Health Board or employee) for the use of the staff would therefore be outside the scope of VAT.

5.2.9 Partners should obtain advice when implementing joint contract arrangements to ensure that the employment status is supported by appropriate contracts that meet HMRC criteria; and also that they meet the requirements of S10 of the Act.

(b) Back office support services

5.2.10 The provision of back office support services in return for consideration is a taxable supply for VAT purposes and therefore the Local Authority/Health Board would be required to account for VAT on any payments received from the Integration Joint Board in return for the provision of these services.

5.2.11 Where the Local Authority/Health Board supplies the Integration Joint Board with a right to occupy defined areas such as office space, for example, it will be treated as making a supply of property for VAT purposes. The supply of land and property is generally exempt, subject to an option to tax and the Local Authority/Health Board will need to consider whether it is making an exempt or taxable supply of office space.

Provision of services for no consideration

5.2.12 As part of their roles in the public sector, it is generally accepted that Local Authorities and Health Boards will often provide goods and services free of charge. Should the Local Authority/Health Board not receive any consideration from the Integration Joint Board in return for the provision of support services (including staff secondments), it will be treated as making a non-business supply for VAT purposes and will not be required to account for VAT on the provision of its services.

5.2.13 Where the Local Authority/Health Board provides support services as a non-business supply it will need to consider its VAT recovery position in respect of any costs it incurs in the provision of those services. A Local Authority can usually recover VAT incurred on non-business activities under Section 33. This isn't the case for Health Boards and they will need to consider whether any VAT incurred on expenditure related to the provision of support services is recoverable under the COS headings; however, on the basis that most of the costs of providing these services will be staff, any non-recoverable VAT should be minimal.

5.2.14 Where the Local Authority/Health Board intends to treat the provision of support services as a non-business activity it will be important to ensure that the provision of services are not linked to the payments made by the Integration Joint Board to the partners. Should they be deemed to be linked, HMRC may determine that part of the funding should be treated as consideration for a supply of services by the Local Authority/Health Board to the Integration Joint Board. This is unlikely given the requirements of the Act and Statutory Guidance for development of the Strategic Plan.

5.2.15 Similarly with the payments made to the Integration Joint Board by the Health Board and Local Authority for the delegated functions, where there should be no explicit netting off from the sums delegated to the Integration Joint Board to cover the cost of providing the support services.

5.2.16 It is recommended that where the provision of support services is treated as a non-business activity, Service Level Agreements are carefully drafted to avoid the risk of HMRC deeming that there has been receipt of consideration. Partners may obtain comfort on this point by approaching their local HMRC officer in a written submission.

5.2.17 In 2011, HMRC introduced VAT legislation that encouraged bodies, primarily in the public sector, to share costs. The intention of the legislation was to deal with the situation where bodies that could buy in services from another body refused to do so as a result of the additional cost of irrecoverable VAT; and instead chose to employ their own staff rather than use the resources available in other public bodies.

5.2.18 The HM Treasury viewed this as inefficient and introduced legislation that allowed for the establishment of a legal cost sharing group to deliver services and to allow them to be exempt for VAT purposes. As the main cost for the supplying body was salaries then there is little or no impact on the partial exemption position of that body.

5.2.19 The Integration Joint Board, Local Authority and Health Board could form a cost sharing group, for VAT purposes which would allow the Integration Joint Board to draw down services, VAT free.

5.2.20 Whilst there are a number of conditions that must be met, a cost sharing group may well be a feasible structure to allow the Local Authority and Health Board to deliver services (consisting mainly of staff time) to the Integration Joint Board.

5.3 Capital

5.3.1 In the medium term it is unlikely that the Integration Joint Board will be empowered to own capital assets and the VAT regimes of the Local Authority and Health Board will apply to capital assets used to provide the delegated services.

5.3.2 Should the Integration Joint Board be empowered in due course, for VAT purposes it will be acting as a lead agent for the Health Board and Local Authority and not making any vatable supplies in its own right. Consequently it will not be entitled to recover VAT on capital expenditure incurred on assets used to provide those services and it is likely to be more efficient from a VAT recovery perspective for capital expenditure to be undertaken by the Local Authority or Health Board.