Value Added Tax

136  This is a general outline of the potential supplies for VAT purposes that may arise in the provision of local authority social care services.  VAT can represent a material additional cost on any social care PFI project and this Procurement Pack should therefore not be relied upon.

137  The first question to address is which party is making the supply of the social care facilities to the user and it is important that the documentation reflects the intention of the parties. Under a social care PFI project, Local Authorities will pay the Service Payment to the Service Provider in consideration for the provision and operation of serviced accommodation.  This represents a standard rated supply by the Service Provider and VAT will be payable by the Local Authority in addition to the Service Payment.  The Model Contract which provides that all sums due under the contract are exclusive of VAT.  Accordingly, where VAT is payable the supplier is required to issue a proper VAT invoice to the recipient of the supply.

138  VAT suffered by a Local Authority in connection with any business activities carried on by it will be recoverable provided that the VAT can be attributed to a taxable supply made by the Local Authority.  There is no entitlement for a Local Authority to recover VAT charged to it in respect of its non-business activities.  In a social care PFI project, Local Authorities may seek to rely on the refund scheme for non-business activities governed by section 33 of the Value Added Tax Act 1994 ("VATA").   Broadly, section 33 provides that a Local Authority can recover any VAT charged to it in relation to the provision of goods and service provided that the provision of such goods and services is not for the purposes of a business activity carried on by it.

139  In considering the VAT position, the Local Authority should make reference to the long standing Memorandum of Understanding ("MOU") between HM Customs & Excise (now HM Revenue and Customs) and the Chartered Institute for Public Finance and Accountancy.  The MOU sets out the various scenarios relating to the provision of social care services and their VAT consequences.1  

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1 This MOU maybe subject to change following the recent VAT and Duties Tribunal decision (which found in favour of the appellants) in the joined appeals of Edinburgh Social Leisure, South Lannockshire Leisure and Renfrewshire Leisure.