Health and Care update: VAT structuring

Published: Wednesday 18 November 2020

You will probably be under the impression that all CQC or Ofsted regulated services are exempt from VAT and therefore care providers cannot reclaim VAT on their costs.

We are aware of a number of specialist advisory firms offering CQC and Ofsted registered care providers the ability to restructure the corporate and operational structure of their business to allow charging of VAT on their invoices to local authorities. The reason for this restructuring is to allow care providers to reclaim an element of VAT on their costs (including capital costs). The planning is only possible where care operators have a significant proportion of residents funded by the local authorities (as opposed to private fee-paying residents).

The restructuring is based on the ability to sub-contract care services from a non-State regulated entity to a State regulated entity and we are witnessing an increase in care operators entering into these new arrangements. We are advised that the planning and restructuring being undertaken is supported by counsel opinion, with the firms providing full support including disclosure to HMRC and contract novation with the local authorities.

If applicable to your business, adopting such a restructuring can have significant value in terms of recouping costs of building work, increased EBITDA and increased sale value of your business (being a multiple of EBITDA). However, we are yet to see what the impact could be on a sale process. For example, if a buyer does not agree with the planning and requires retentions or reduction in value. 

What is clear is that operators are looking for opportunities to reduce their costs, particularly in the current environment. 

As always, we are happy to discuss the principles of this type of planning in the current environment.

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