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Baroness Seccombe: My Lords, two years ago I was involved in securing care from an agency for a relation. Funds had to be found and VAT had to be paid. If the amendment were accepted, it would mean that people who received direct payments would be better off than those who had to find the funds for themselves. Am I right or have I got that rather muddled?

Baroness Masham of Ilton: My Lords, we have a problem, in that the microphone has become severely disabled; in fact, it has broken its neck. However, I congratulate the noble Lord, Lord Swinfen, on his research. For severely disabled people, employing carers can be complicated because it may involve a rota system comprising several carers. Insurance, holiday pay, maternity leave and other such matters have to be taken into account. Help may need to be provided in resolving

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those matters. Is it possible for people to receive such help even if they receive direct payments from the local authority, because these matters can be complicated? Many severely disabled people are living on their own without family support.

Baroness Darcy (de Knayth): My Lords, I support the noble Lord, Lord Swinfen, as I have added my name to Amendment No. 9. He gave a clear and comprehensive explanation. I steered clear, nervously, of adding my name to a provision which concerned VAT matters, but nevertheless I support this whole group of amendments as they are important.

Baroness Gardner of Parkes: My Lords, I do not know whether my next point has already been discussed at an earlier stage, but I should say that a body can amass a fairly large turnover before it has to register for VAT. I should have thought that such a provision would encourage those using carers to use people who had small businesses or who were setting up in business. The provision may be a good one in that sense.

Baroness Cumberlege: My Lords, I understand your Lordships' anxiety which lies behind these amendments. The level of a direct payment must be sufficient to enable the recipient to buy the services the payments are intended to cover. It must also enable someone who gets a direct payment to purchase the services legally. By that I mean that a local authority cannot set a payment at such a low level that the only way someone could purchase the relevant services would be to break the law, by not, for example, complying with legal responsibilities to pay tax. If a local authority deliberately offers an amount in direct payments which would not enable the recipient to buy adequate services, taking into account any financial contribution he may be required to make, that is effectively the same as the local authority not offering direct payments at all. It would not be a proper exercise of local authorities' powers and it could be challenged.

The Bill leaves it to local authorities to decide on the level of a direct payment. To do this, the local authority will have to reach a view on how much it will cost the individual to buy the relevant service. The authority's assessment of costs will have to take account of the legal responsibilities involved. I can give a commitment to my noble friend Lord Swinfen that the Section 7 guidance that we shall issue will say that the direct payment should--taking into account any financial contribution that the authority is asking the individual to make towards the cost of his care--be sufficient for the individual to purchase the relevant service, and should take account of the fact that there may be legal responsibilities, such as paying VAT or national insurance, in doing so. However, local authorities also have a duty to obtain value for money, so the payments will not automatically cover specific costs where there is a more cost-effective way of securing the service. Local authorities cannot be required to fund the cost of a person's preferred method of purchasing a service if, in fact, a service of adequate quality can be purchased more cheaply in another way.

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So, for example, the cost of the services may include a value added tax element, but it may not need to if the person can secure adequate services from a provider who is not required to charge VAT. It will be for the local authority to decide on an appropriate level of direct payments. Clearly the payment of VAT is something that individuals will wish to consider when deciding what arrangements they will make using their direct payments, just as they will take into account other factors which cause variations in cost and quality of service from different providers.

No amendment is necessary to enable the Secretary of State to issue guidance, as Amendment No.7 aims to do. Clause 3(3) already gives him the power to issue guidance by adding direct payments to the list of social services functions in Schedule 1 to the Local Authority Social Services Act 1970. Sections 7 and 7A of that Act authorise the Secretary of State to issue guidance and directions in relation to local authorities' exercise of their social services functions. Amendment No. 7 is therefore not required.

Amendment No. 9 raises the question of what being a "good" employer means. People have different views and different expectations about what a good employer is. It is not clear what the amendment means in this respect and it would therefore be difficult to implement, or enforce. It is a rather unclear and open-ended commitment. It could result in local authorities being required to set the direct payment at a higher level than they thought appropriate. That would interfere with their ability to use their resources efficiently and to help all the people for whom they are arranging services.

I now turn to Amendment No. 8. I understand the concern of the noble Baroness, Lady Hamwee, in that she wishes to see that people who receive direct payments are not disadvantaged with regard to paying VAT. I have already explained that, where people use their direct payments to purchase services upon which VAT is charged, they will not be able to recover the VAT. There is a special provision which enables local authorities to recover the VAT in relation to their non-business activities but there are strict limitations imposed by EC law on the bodies to which this provision can be applied. These limitations preclude members of the public, so VAT cannot be refunded to individuals.

Amendment No. 8 seeks to enable local authorities to recover the VAT which people who receive direct payments incur. There are two possible scenarios but neither appears to achieve what the noble Baroness intends. In the first a local authority pays an agency to provide a service to an individual. In that case, the local authority will be able to recover any VAT, but then it will not have made a direct payment. The Bill already allows for the possibility that people may continue to receive services arranged by the local authority or a combination of direct payments and services. If the local authority does not pay the money to the individual but pays it directly to the care agency, that is effectively what has happened. The individual does not receive or spend any direct payments.

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In the second scenario, the local authority does make direct payments to the individual. The individual receives the payments and decides to purchase services from an agency which is required to charge VAT. Under Amendment No. 8 the individual may ask the local authority to act as agent and purchase the services on his behalf from the care agency. The individual passes the money back to the local authority, which passes it on to the care agency. For VAT purposes, the supply would still be considered to have been made by the care agency to the individual, not to the local authority. The local authority is acting only as an intermediary. Even though the local authority may have paid the agency, it cannot recover the VAT.

I have already said that we intend to use Section 7 guidance to say that direct payments should be sufficient--together with any financial contribution from the individual--for people to purchase the relevant service taking account of the fact that there may be legal responsibilities such as paying VAT. But local authorities also have a responsibility to obtain value for money, so the payments will not automatically cover specific costs where there is a more cost-effective way of buying the service. Individuals cannot recover the VAT they may have to pay. That is not something we can change. The payment of VAT is something that individuals will wish to consider when deciding what arrangements they will make using their direct payments, just as they will take into account other factors which cause variations in cost and quality of service from different providers. A difficulty arises if we seek to advantage purely for VAT purposes those receiving direct payments but not those who pay for their own care. As my noble friend Lady Seccombe said, we believe that that would be a very unfair arrangement.

My noble friend Lord Swinfen asked whether we would refer the question of paying VAT to the technical advisory group. The general issue of matters which will affect the level of direct payments has already been considered by the technical advisory group, but I have mentioned what we intend to say in guidance. I hope it will be reassuring if I say that the technical advisory group will be consulted on that guidance and we will be undertaking a wider consultation generally.

The noble Baroness, Lady Hamwee, asked whether I could give an assurance that generating income is not in the Government's mind. I can give that very firm assurance.

The noble Baroness, Lady Masham, asked whether someone could obtain help from the local authority on VAT issues. Local authorities may offer advice but probably the best way to obtain guidance is through Customs and Excise. The noble Baroness asked whether services will be provided by local authorities. The purpose of direct payments is that they are instead of services which are provided. It is possible for a recipient to receive both direct payments and services together, but clearly one would not have a home help and then receive direct payment to pay for a home help. I hope that I have made that matter clear. The noble Baroness looks mightily puzzled and perhaps we can discuss it afterwards.

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We believe that Amendment No. 8 is ingenious but we do not believe that it achieves its desired effect. If the local authority purchases the services, then VAT may be recovered but no direct payment is made. If the local authority purchases the services acting as the individual's agent, then the supply is to the individual and the local authority may not recover the VAT. We believe that the amendments should not be supported.

6.45 p.m.

Lord Swinfen: My Lords, I thank my noble friend for a long and comprehensive reply. I was encouraged when she indicated that all proper taxes and so forth must be included in the grant. However, I was a little disappointed when she gave me the impression that people in receipt of grants might lose some of their independence by not being allowed to use the care agency that they particularly want in case there is a charge for value added tax.

I am grateful that some of these matters will be considered by the technical advisory group and by other bodies when my noble friend and those in her department are taking advice. I wish to read the reply because it was long and complicated and I shall reserve my right to come back to the matter on Third Reading. In the meantime, I beg leave to withdraw the amendment.

[Amendments Nos. 8 and 9 not moved.]

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