The
Committee consisted of the following
Members:
Anderson,
Mr. David
(Blaydon)
(Lab)
Bacon,
Mr. Richard
(South Norfolk)
(Con)
Brennan,
Kevin
(Lord Commissioner of Her Majesty's
Treasury)
Byers,
Mr. Stephen
(North Tyneside)
(Lab)
Cable,
Dr. Vincent
(Twickenham)
(LD)
Clarke,
Mr. Kenneth
(Rushcliffe)
(Con)
Dowd,
Jim
(Lewisham, West)
(Lab)
Drew,
Mr. David
(Stroud)
(Lab/Co-op)
Engel,
Natascha
(North-East Derbyshire)
(Lab)
Evennett,
Mr. David
(Bexleyheath and Crayford)
(Con)
Francois,
Mr. Mark
(Rayleigh)
(Con)
Hemming,
John
(Birmingham, Yardley)
(LD)
Primarolo,
Dawn
(Paymaster
General)
Reed,
Mr. Andy
(Loughborough)
(Lab/Co-op)
Ruddock,
Joan
(Lewisham, Deptford)
(Lab)
Salter,
Martin
(Reading, West)
(Lab)
Walter,
Mr. Robert
(North Dorset)
(Con)
Celia
Blacklock, David Slater, Committee
Clerks
attended the Committee
Seventh
Delegated Legislation
Committee
Thursday 1
March
2007
[Mr.
Jimmy Hood
in the
Chair]
Value Added Tax (Health and Welfare) Order 2007
2.30
pm
The
Paymaster General (Dawn Primarolo):
I beg to
move,
That the
Committee has considered the Value Added Tax (Health and Welfare) Order
2007 (S.I., 2007, No.
206).
Good afternoon,
Mr. Hood. I welcome you to the Chair and hope that I shall
not detain the Committee too long with my opening remarks.
The order
amends the existing VAT legislation in relation to supplies made by
registered medical and health professionals. It may help the Committee
if I briefly outline the background to the order. Historically, in the
United Kingdom, if a health professional who was registered on a
statutory professional register provided services using his or her
professional training and knowledge, those services were exempt from
VAT, with certain limited exceptions, such as services that were
predominantly legal or administrative in nature. That has been the
position under successive Governments, who, like us, have sought to
apply the European Union legislation that provides VAT exemptions for
the provision of medical care in the exercise of the medical and
paramedical professions, as defined by the member state concerned, as
widely as possible, in the interests of both practitioners and
patients.
However,
following a legal challenge from a United Kingdom doctor to the
European Court of Justice, the Court ruled in November 2003 that VAT
exemptions should be limited to those services intended principally to
protect the health of individuals. Successive Governments have
therefore applied exemptions for services provided by registered health
professionals more widely than is permitted by European law. The order
is designed to regularise the position and to implement that legal
ruling, and the Government have needed to consider how to maintain the
exemption as widely as possible, while complying with the
ruling.
Let me be
absolutely clear on one point. There is no question of VAT becoming
chargeable on any aspect of health care as a result of the order.
Patients who receive health care from a GP or other health
professional, whether on the NHS or privately, will not face any VAT
costs. The only effect of the order, as required by the ECJ decision,
is to make it explicit that services provided by registered health
professionals, subject to some exemptions, can qualify for exemption
from VAT only where the principal purpose of the service is to protect,
which includes maintaining or restoring, the health of
individuals.
The services
affected by the order will be mainly those undertaken commercially by
health professionals outside their standard NHS contracts for the
benefit of
third parties, rather than for the patients themselves. Examples of
services where the VAT position will change include providing witness
testimony and reports for litigation; compensation or benefit claims;
reports and medical examinations for the purpose of providing certain
fitness certificates, such as those needed to hold a licence to drive
or fly; some occupational health services; and cosmetic services
provided independently of any health care treatment programme. However,
some services whose purpose is not principally to protect the health of
the individual, such as certain education and insurance-related medical
services, will remain free from VAT.
We do not expect the change to
have a significant impact on either compliance burdens on doctors or
additional VAT paid, because the UK maintains the highest VAT
registration threshold in the EU and because most of the activities of
health professionals, including all medical care, will remain VAT
exempt.
Most health
professionals are not VAT registered at present and will not have to
become registered as a result of the order. There will be no change for
those health professionals; they will not be required to charge VAT on
any of their services. The only impact is likely to be upon those
health professionalsmainly GPs, doctors and
consultantswho do a lot of commercial work for solicitors,
Departments and the like and are already VAT registered on the basis of
their existing taxable business activity, or whose level of taxable
supplies takes them over the VAT registration threshold.
As set out in the regulatory
impact assessment, Her Majestys Revenue and Customs estimates
that some 4,350 health professionals will be affected, and then only to
the extent that they undertake commercial services that are not
principally aimed at protecting the health of the individual. We
believe that the vast majority of health professionals will be able to
carry on as previously.
John
Hemming (Birmingham, Yardley) (LD): May I ask the
Paymaster General to confirm whether, as advice to patients on to how
to improve their health is given on sick notes, they will not be
covered by the VAT regulations and remain exempt, because they involve
health
care?
Dawn
Primarolo:
As I have tried to make clear, any service
provided by a health professional in pursuit of an individuals
health care remains in the same category as now: it is exempt from VAT.
I am trying to be very specific and to make absolutely clear to the
Committee the narrow terms on which the exemptions need to be amended
to comply with the ECJ ruling. I realise that this is important for all
Members.
The
Government believe that the vast majority of health professionals will
be able to carry on as before. Furthermore, given the nature of the
services involved, it is likely that any additional VAT will be
chargeable to businesses and public sector bodies, many of which will
be able to reclaim the VAT.
The
Government have extensively consulted representatives of the medical
profession and others with a view to assessing the full impact of the
ECJ decision on health professionals and their clients. We appreciate
the many valuable responses to the consultation
process; they have not only contributed to maintaining as wide a VAT
exemption as is consistent with the ECJ decision, but enabled HMRC to
anticipate some of the problems that might have arisen in the
transition. We have addressed those problems in extensive
guidance.
In response
to concerns expressed during the consultation, the order will not come
into effect until 1 May 2007. That will allow sufficient time
to enable health professionals to undertake any necessary
familiarisation and administrative changes. I stress that the ECJ
decision was taken in 2003, so the profession has been aware of it, and
discussions have been taking place, for a considerable time.
I would have
preferred not to need to make these changes at all. In line with
successive Governments, we have always sought to maintain as wide an
exemption for medical services as we possibly can. However, following
the successful legal challenge in the ECJ, some change to the scope of
the UKs VAT exemption was unavoidable. None the less, I hope
that the Committee will agree that the Government have struck the
correct balance between complying with the ECJ ruling and consulting
properly with the profession and that we have come up with the right
result in protecting the most important aspects of the VAT exemption
regime. On that basis, I commend the order to the
Committee.
2.40
pm
Mr.
Mark Francois (Rayleigh) (Con): May I, too, welcome you to
the Chair, Mr. Hood. I look forward to serving under your
chairmanship, and I assure you that I do not intend to detain the
Committee inordinately. It is also a pleasure to be back in Committee
debating opposite the Paymaster General. It seems like only a few hours
since we were crossing swords over tax credits during Treasury
questions this morning, but that is a different topic.
With regard to this statutory
instrument, the explanatory memorandum and the accompanying regulatory
impact assessment point out that the order amends part of schedule 9 to
the Value Added Tax Act 1994, specifically the VAT exemptions
relating to health and welfare. The effect of the order is to amend
slightly the list of services that are exempted for VAT purposes,
following an ECJ ruling, as the Paymaster General said. The effect, at
the margin, is to tighten up the list of services that are VAT
exempt.
In practice,
the change involves removing the exemption from things such as
preparing witness reports for litigation or compensation purposes; the
conduct of certain medicals for the provision of fitness certificates
and so on; and some related aspects of occupational health work. The
very detailed RIA, which is one of the clearest from HMRC that I have
read, argues that the changes will be relatively minor and will take
place very much at the margin. As it points out under the heading,
Objective,
The
liability of some services provided by registered health professionals
will change as a result, but the VAT treatment of health care and
treatment, and of all NHS work, will not be affected by this
amendment.
The RIA estimates that only
some 650 people will have to register for VAT as a result of the
changes, although a larger number of peoplefewer than
4,000who are already VAT registered might also be
affected and that the net revenue estimate is nearly £10
million. That is in the detail, but it is always a good idea to look
for the overall sum. That will, in effect, represent a net revenue gain
to the Exchequer.
I
have a few questions to ask the Paymaster General before we approve the
order, which I sense the Committee will be minded to do. First, on
timings, the RIA tells us that the order is due to come into force on 1
May 2007the Paymaster General reiterated that this
afternoonbut the RIA also states under the same heading
that
The term
medical care will not be defined in UK law, but
detailed guidance will be issued by HMRC on its
application.
So this is
another case in which we have an order, but we need guidance to give
form to the way in which it will be applied in practice.
The order comes into effect in
two months time and the revised guidance is presumably
contained in public health notice 701/57 on health professionals that
the RIA refers to, but when was it published? In the Paymaster
Generals opinion, were interested parties given sufficient time
to plan for the adjustments that will follow the change in
interpretation that the order brings
about?
It is apparent
that the Government have consulted on the changes. The RIA lists a
number of organisations that have been contacted on the issue,
including the British Medical Association, the British Dental
Association, the Pharmaceutical Services Negotiating Committee and the
Association of British Insurers. There is no suggestion that the
Government did not talk to the health professionals. However, under the
heading, Business sectors/people affected, the RIA also
states:
Companies and
non-departmental public bodies who engage external contractors to
undertake Health & Safety assessments and medicals/reports for
pre-employment, litigation or other reasons will incur additional
VAT.
In that case, was
any major trade union consulted in advance about the changes? Anything
that relates to health and safety or occupational health could be
reasonably regarded as of interest to them and their members. It would
be helpful to know whether the Government spoke to trade unions as
well, or just to the medical professional
bodies.
Having given
the Paymaster General private notice of it, I turn to a related point
about medical VAT as it affects clinical academics. Some such academics
might be affected by the order if they were at any time to indulge in
private practice, which would bring them within its scope. However,
this issue also relates to an ECJ
ruling.
In essence,
NHS trusts have traditionally been able to recover VAT when they have
hired clinical academics from teaching institutions and used them to
carry out work on the trusts behalf. We have another
rulingmade by the VAT and duties tribunal in Glasgow in
2005that the VAT on such services would no longer be
recoverable by NHS trusts. That was also a change from established
custom and practice, as indeed was what the Paymaster General
recommended earlier. It has caused quite a problem, particularly for
teaching hospitals, which often rely on such specialist members of
staff.
The public
sector tax forum represents NHS finance directors and managers in
trusts across the UK. It has raised with Health and Treasury Ministers
the issue of how that VAT interpretation will affect them. I was
updated by the forum yesterday, which summarised the situation in an
e-mail:
The
Forum is worried that NHS Trusts may now have to pay VAT charges
retrospectively for supplies they have received which will impose a
significant financial burden on already over-stretched budgets with the
money having to be found from other
services.
In fairness,
Ministers have apparently been offering for some time to provide clear
guidance on that specific issue, which would allow the trusts to plan.
This is a pressing matter, which is why I was keen to raise it today,
because we are coming to the end of the financial year and a number of
trusts have had to try to make provision, but without the clear
guidance that would tell them, one way or another, which way the
liability is likely to
fall.
The forum
summarised the problem by saying that
the
delay in HMRC
issuing guidance on this is causing Trusts some difficulty as they near
the end of the financial year as they do not know if they need to make
provision for paying VAT for services used in the current year and also
if they should budget for the extra cost in the forthcoming year. Given
the uncertainty being caused, the Forum is asking if the Minister could
please indicate when the HMRC will be issuing new
guidelines.
Given
that that is pretty important to trusts around the country, it is
reasonable to request that the Government clarify the position. Will
the Paymaster General say when those important guidelines will be
published, as well as the other guidelines that I asked her about
earlier? On behalf of trusts around the country, I thank you,
Mr. Hood, for your understanding in this matter, in the hope
that we can an important answer to an important
question.
2.48
pm
John
Hemming:
I, too, welcome you to the Chair, Mr.
Hood. My key concern has been resolved by my intervention. I think that
everyone generally supports this sadly unnecessary device, which
introduces doctors to the joys of accounting for partial exemption from
VAT, so the best thing that I can do for everybody is sit
down.
2.49
pm
Dawn
Primarolo:
I thank the hon. Member for Birmingham, Yardley
for his very brief comments. However, the doctors who will be affected
on the whole are already above the VAT registration threshold and are
trading on the basis of non-medical exempt supplies, so they are
already part of the VAT system due the substantial additional work that
they are
doing.
John
Hemming:
Apart from the 650 people who have been
mentioned.
Dawn
Primarolo:
If the hon. Gentleman looks very closely, he
will see that that is not the number of people who will have to
registerwe think that that is the number who will be
affectedand some of them are
still trading under the VAT threshold. However, the substantial number
that are already undertaking such work are already VAT registered. I am
sure that the hon. Gentleman will agree that those GPs and doctors who
are not registered, and who do not want to be registered, need not do
the work, because it is extra work, outside their national health
service
contracts.
John
Hemming:
I refer the Paymaster General to section 7 of the
RIA, which makes it clear that
650 health
professionals...are expected to exceed the VAT registration
threshold as a result of the
changes.
They must
therefore register. The remaining people will not need to register,
because they are under the 61 grand
threshold.
Dawn
Primarolo:
Yes, I agree. As I was speaking, I realised
that I was incorrect, and I thought that the hon. Gentleman would want
to correct me. He is quite right: 650 people might have to register,
depending on whether the amount of work that they do takes them over
the VAT threshold.
I
shall return to the questions asked by the hon. Member for Rayleigh.
The guidance was published 31 January. I consider that three
years notice, two substantial consultations, publishing the
guidance by the end of the January and a date of introduction
of 1 May to be ample time to make the adjustment. Two
full-scale, wide-ranging public consultation periods of consultation took place where documents were published,
and it was entirely up to any organisation, including the trade unions,
to respond to the consultation on the issues in which they were
interested.
The hon.
Gentlemans question about joint employment guidance is outside
the scope of the order, but with your leave, Mr. Hood, I
should like to answer it. The facts that he put before the Committee
are not quite right. The supply of care or treatment by a nurse or
other health professional remains VAT exempt. However, the position is
different and a VAT cost might arise where the supply relates not to
health care or treatment but to staff.
Until now, the Department has
treated all such contracts as VAT exempt, whether used at a university
or elsewhere, on the basis that the supply of care or treatment was
involved. The university of Glasgow decided that it did not accept the
exempt category. It wanted such contracts to involve a taxable supply
of staff. When a contract becomes a taxable supply, VAT is charged, but
most importantly for the organisation that charges the VAT, it becomes
part of its business expenses and therefore reclaimable against the VAT
that it has paid. It was presumably quite important for the university
to say that such contracts dealt with the supply of staff, rather the
supply of staff who provided care and treatment, as that would enable
it to reclaim the VAT.
I understand
that the tribunal ruled that contracts were taxable when they were
quite clearly for the supply of staff. That is not a matter for HMRC,
because it is not about whether the VAT position has changed, but about
how universities and the health service have interpreted whether the
contracts are exempt or chargeable. In discussion with the Department
of Health and university representative bodies, HMRC has considered the
types
of contract that are used and all the other documentation and whether
some of them are joint contracts of employment and therefore still VAT
exempt. Until then, the Department was counting all of them as VAT
exempt. This is not the Departments doing; the university
wanted to charge VAT, presumably to include it in its business
costs.
I understand
that a memorandum of understanding was agreed with the Department of
Health and the universities some time ago, not recently or in the past
few days, that explains situations where joint contracts exist and are
therefore exemptby definition, they relate to the supply of
staff. It is up to the Department
of Health, along with the universities, to circulate that guidance, and
I understand that they are doing so. However, there is no change at all
in VAT law; the situation results from a challenge to the
interpretation.
I
think that I have tried your patience a little, Mr. Hood,
with that long and complicated answer. Nothing connected with the order
remains outstanding, and I therefore commend it to the
Committee.
Question
put and agreed
to.
Resolved,
That
the Committee has considered the Value Added Tax (Health and Welfare)
Order 2007 (S.I., 2007, No.
206).
Committee
rose at four minutes to Five
oclock.