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Lord Carter: As the noble Lord said, we shall reach Amendment No. 19, which deals with VAT. But to help the Minister perhaps I may now contribute on this point and deal with it. Then Amendment No. 19, which I am supposed to move, will obviously be withdrawn. All the points have, in fact, been made by the noble Lord, Lord Jenkin of Roding. It is an important point about VAT that local authorities, but not individuals, can reclaim VAT if the agency is registered for VAT.

There is a minefield here because of the EU directives regarding the level of VAT. That may cause problems. There would seem to be a difficulty if an individual receives direct payments which attract VAT and the recipient is not able to reclaim it because he is not able to register.

I wonder whether a way round that difficulty is to apply zero rating. Zero is a rate of VAT and the payments would be exempt. Are we allowed to apply a zero rate to direct payments under EU directives?

Baroness Darcy (de Knayth): I, too, support the noble Baroness's amendment. An identical means test is encouraging, and is very much what my amendment--Amendment No. 12--is about. In some ways, I prefer my amendment, in that it clearly states that the tests should be identical. However, it may be that the noble Baroness's amendment is more acceptable.

I look forward to hearing what the Minister says. It may influence me very much in what I do about Amendment No. 12.

Baroness Cumberlege: I think the amendments are very similar. I hope that what I am about to say will meet the needs of the noble Baroness, Lady Darcy (de Knayth).

We understand and share the concern that neither service users nor direct payment recipients should be treated more favourably one than the other in the question of the financial contribution that each is expected to make toward the cost of their care. I understand the concern of the noble Baroness, Lady Hollis, that the Bill might appear to apply harsher criteria for direct payments than when charging for services. That is not true. Local authorities do not have to charge users of services. They have discretion there and we should want them to have discretion with regard to direct payments.

The Bill gives local authorities the discretion on whether or not to take someone's financial circumstances into account. It does not require them to do so. The Bill also gives local authorities discretion on how they take someone's financial circumstances into account. This is intended to mirror the situation which currently exists in relation to charges for non-residential care, where local authorities can decide whether or not to charge, and how much to charge. It is the Government's aim to create a level playing field on the issue of whether, and how much, people pay towards the

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cost of their care, so that there are no perverse financial incentives to seek direct payments or, indeed, to refuse direct payments.

It is therefore the Government's intention to issue Section 7 guidance on this issue. The guidance will stress that local authorities must treat people fairly, and should treat both service users and direct payment recipients in an equivalent manner. So, when considering the financial contribution that direct payment recipients should make towards the cost of their care package, the authority should treat them in the same way as they would have treated them under the authority's charging policy had the individual been receiving the equivalent services.

Baroness Hollis of Heigham: I thank the Minister for giving way. If she is saying that the local authorities should treat them in the same way, why does she not use the same words?

Baroness Cumberlege: We have made it quite clear in the Bill but, if the noble Baroness feels that there is something better that we can do, perhaps we can discuss it before the next stage of the Bill.

Perhaps I may now address the concerns of my noble friend Lord Jenkin of Roding about VAT. I understand that there is an amendment that has been spoken to by the noble Lord, Lord Carter. No amendment is necessary to ensure that direct payments are not subject to VAT. VAT is a tax on supplies. It is not due on payments which the local authority makes to an individual to enable that individual to buy services.

People who receive direct payments may have to pay VAT on some of the services that they purchase. Many of the uses which recipients will make of direct payments will not incur VAT--for example, if they employ their own personal assistant or purchase services from an agency operating below the VAT threshold or from a charity providing services on a not-for-profit basis.

Payment of VAT is something that individuals will wish to consider when deciding from whom to purchase their services. Clearly that is an issue which local authorities will have to take into account when they are deciding the level of the direct payment.

Lord Carter: I do not expect the Minister to give me an answer to my next point, which is a highly technical one. It will be interesting to know whether the Government will have the power by regulation to apply to those services a zero rate--which is a rate of VAT--instead of the rate of 15 per cent.

Baroness Cumberlege: We are trying to ensure that the recipients of direct payments act in the same way as other members of the public. This provision is to try to give them more independence. We should be reluctant to do this, because we hope that the independence that they gain puts them much more on an equal footing with members of the general public.

Lord Jenkin of Roding: Perhaps I may come back on that point. First, let me offer a profound apology to the noble Lord, Lord Carter. Although I had laboriously entered his amendment as a number on my Bill, I failed

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to read it. I do apologise. I had given notice on an earlier occasion that I intended to raise this matter. However, with great respect to my noble friend I am not sure whether she has addressed the problem.

It must be the case that, as direct payments become more common and their acceptability becomes more widespread, highly specialised, expert firms will be formed to undertake to deliver expert and trained services to the people who need them.

As I said earlier, from the beginning health services which are supplied under contract have always been exempt from VAT. It is difficult to see why, say, domiciliary nursing services--somebody coming in to nurse a terminally-ill patient, which is not uncommon--should be free of VAT, but somebody who comes in to look after a disabled person and who may be providing many of the same services--somebody with a high level of training--should, because they are supplied by a firm which is above the threshold, incur VAT.

The practical problem will arise when the local authority is deciding whether to make a direct payment after the client has applied for it and indicated that he or she wishes to contract with Personal Services plc (or whatever it may be called). The council may say that that will cost more because they are liable to VAT and it will pay only what would be required if the firm was below the threshold for that tax.

In the consultation document and in her opening speech at Second Reading my noble friend gave the example that, if somebody wanted a service which costs £300 and the local authority knows that it can be contracted for £200, why should the council pay the extra £100? Yet the difference may be the VAT at 17.5 per cent. It is militating against the growth of extremely valuable services and highly specialised companies employing skilled, trained assistants which could provide an admirable service for people in receipt of direct payments.

I cannot expect my noble friend to give what may be a Treasury answer from the Front Bench in this debate. However, this is a problem which needs to be addressed. I cannot understand why there should be a distinction between health services and social services in that regard when one is dealing with a defined category of people; namely, those who qualify for local government support by direct payments.

5.30 p.m.

Baroness Seear: To add to what the noble Lord, Lord Jenkin, said, in practice there may be a number of cases where the service rendered is only partially related to health. I can well imagine a situation where someone comes in to help with a simple dressing or other minor help a disabled person may need by way of treatment and then tidies up the living room and makes up the bed. Where does health stop and other domiciliary services begin? If one is VAT-free and the other VAT-charged, the situation will become extremely complicated.

Lord Carter: As we are discussing the amendment relating to VAT, perhaps I may respond to that. It may

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mean that the recipient has to choose a supplier of a service on the basis of cost rather than skill. We all know, when obtaining quotes for painting our homes, the difference in the cost between a painter registered for VAT and one that is not. It tends to affect the size of the quote. Effectively, the recipient may be saying, "I would sooner have this other person but, because they will cost more due to the rate of VAT, I shall have to choose a supplier who is not so effective but is cheaper". The Government must look at that as an important point.

To return to the zero rate point--I do not want to overemphasise this--it is common for a supplier who is supplying a service in the UK to have to apply the VAT rate; but if he is supplying that service for somebody overseas he applies a zero rate. It is as simple as that. If those services can be included in the category of the zero rate, it may solve the problem.

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