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Public Bill Committee Debates

Value Added Tax (Health and Welfare) Order 2007

The Committee consisted of the following Members:

Chairman: Mr. Jimmy Hood
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.
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 professionals—mainly GPs, doctors and consultants—who 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 Majesty’s 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 individual’s 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 UK’s 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 people—fewer than 4,000—who 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 2007—the Paymaster General reiterated that this afternoon—but 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 General’s 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 trust’s behalf. We have another ruling—made by the VAT and duties tribunal in Glasgow in 2005—that 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.
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. Gentleman’s 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 Department’s 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 exempt—by 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.
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 o’clock.

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