New Clause 2 - VAT and charitable healthcare providers

Finance (No. 3) Bill – in a Public Bill Committee at 2:15 pm on 9th June 2011.

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“The Treasury shall, within one year of the passing of this Act, lay a report before Parliament on the treatment for Value Added Tax of supplies by charities to bodies exercising functions on behalf of a Minister of the Crown of healthcare or welfare services or associated goods’.—(Nic Dakin.)

Brought up, and read the First time.

Photo of Nicholas Dakin Nicholas Dakin Labour, Scunthorpe

I beg to move, That the clause be read a Second time.

I am sure that the Exchequer Secretary will be pleased that I have tabled new clause 2, because it gives him the opportunity to update us on his adumbrations on this and other issues. He will also be pleased that I do not intend to press the new clause, but it is an opportunity for me to raise the issue again.

This week began with The Guardian reporting research that shows the number of registered charities in the UK falling by 1,600 in the past year, and shows that 25% of charities report a fall in income. That is before the impact of any local authority cuts to their funding for the coming year.

At the same time, the Government are keen to encourage and support the voluntary and community sector in taking over services traditionally delivered by the pubic sector. The Prime Minister has only recently re-engaged with his big society concept. It is in that context that I move that new clause 2 be read a Second time.

We have already heard that clause 75 will adjust VAT arrangements to allow academies to enjoy the same VAT regime enjoyed by mainstream schools. Interventions by the hon. Members for Brecon and Radnorshire and for North East Cambridgeshire gave the Committee an opportunity to explore the issue in greater detail. Similar adjustments ought to be possible in a health context.

If, for example, a charity such as Sue Ryder or Lindsey Lodge hospice, which serves my constituency, takes over the delivery of end-of-life care previously delivered by the NHS, it cannot reclaim VAT on non-business supplies, as the NHS could under the former delivery model. Such a transfer essentially creates a VAT gap that has to be filled by charitable funds. It also provides a premium to the Treasury, which is an unintended consequence of the change in policy.

Sue Ryder has provided some information about its experience:

“It is our belief that the government’s public service reform, NHS reform and Big Society agendas are likely to result in charities delivering a greater volume of public services. Hospices are keen to take on these new responsibilities. A recent transfer of an NHS hospice to Sue Ryder under the Transforming Community Services initiative has sparked interest in the viability of charities taking on other NHS hospices and services. We believe there should be a level playing field in VAT between charities and the NHS so that all possible funds can go towards the delivery of the care. Our rough estimate suggests that for every £10m spent by PCTs/NHS on outsourcing hospices to the third sector, the additional cost burden to the sector will be in the region of £400,000.

With this money, Sue Ryder could provide 40,000 hours of care, or 25,000 bereavement sessions for family members who have lost a loved one.”

I do not think that the Government intend to take away those 40,000 hours of care or those 25,000 bereavement sessions from people in a locality at a time of transfer. I think it is an unintended consequence of the way in which current policy affects the transfer process and delivery model.

As its name suggests, Help the Hospices is trying to be helpful. Not only does it help hospices, it has considered the issue overall and how the Government and the Treasury might look to level the playing field. It has said:

“It is, of course, unrealistic to ask the Treasury to write a blank cheque, but it is realistic to look at these issues with some urgency, recognising hospices’ role in public service delivery and the recent rise in VAT, and to address these discrepancies to level the playing field for these important providers of care.

A legislative solution to the problem is the only fair and sustainable way of making a change. We recommend the Treasury should look at their policy around charitable VAT recovery and consider allowing all hospices the right to the same VAT recovery as the NHS. Understandably it may be necessary to factor in the VAT reliefs received by charities on medical equipment and supplies to ensure that we create a truly level playing field and not one where hospices are at an advantage to the NHS. This would enable hospices to best use public funds to deliver more high quality, innovative and cost-effective public services.”

I, too, recognise that the Treasury does not have blank cheques to write, but in cases of future transfer, there ought to be a way of ensuring that the approach applied to VAT for non-business supplies under an NHS delivery model also applies under a charitable delivery model.

Let me say publicly how much I appreciate the way in which the Exchequer Secretary has engaged with this subject in a thoughtful and careful way whenever it has been raised by hon. Members and members of the public. He listened attentively to my ten-minute rule Bill in the House, in which I was supported by Conservative, Liberal Democrat, Labour and Ulster Unionist MPs. Together with myself and the hon. Member for Leeds North West (Greg Mulholland), the Exchequer Secretary also received representations from Sue Ryder, and he committed his officials to do more work on the matter. He has always appeared sympathetic to the issues raised, and understanding of the complexities surrounding the technical points. I hope that his strength of purpose wins the day over the technical issues. He responded in a generally positive way to the Adjournment debate that was secured by the hon. Member for Colchester (Bob Russell), and stated:

“We all recognise and respect the value of the hospice movement, and we all recognise the opportunities and benefits of a greater diversity of supply of services. We agree that it would be most  unfortunate if the workings of the VAT system were to get in the way of sensible progress.”—[Official Report, 10 May 2011; Vol. 527, c. 1144.]

My reason for raising the issue today, and my purpose in speaking to the new clause, is to see whether we are managing to make progress on this sensible provision. I hope that we are.

Photo of Kerry McCarthy Kerry McCarthy Shadow Minister (Treasury)

I commend my hon. Friend on his contribution to the Committee today and on his previous work. I know that he has had discussions with the Minister and secured a ten-minute rule Bill, and he does valuable work to ensure that this issue registers on people’s radar. I, too, have met with representatives from Sue Ryder. They outlined to me the worrying impact of the additional £140 million that the charitable sector would pay as a result of the Government’s decision to increase the standard rate of VAT. They also raised the issue of items that are not VAT-recoverable for charities although they are for public sector organisations such as the NHS.

With the Government’s big society agenda, and the reorganisation of the NHS with the emphasis on competition and alternative service providers, is a much greater role envisaged for charities in health care? Sue Ryder has reported that the transfer of NHS hospices to charitable status under the transforming community services initiative, has sparked interest in more charities taking over NHS services. However, as we discussed under clause 41, charities have made it clear that the transition fund was not sufficient to help them adapt to the Government’s public spending cuts while simultaneously responding to the increased demand for their services. Given a combination of such factors—the NHS struggling with significant budget cuts and being more dependent on the charitable sector—it seems sensible to keep under review their impact, in particular that of the higher VAT rate on charities, and the burden placed on limited finances.

In Bristol, St Peter’s hospice has made immeasurable difference to many of my constituents, but its staff, volunteers and supporters have had to make difficult decisions about their services and ever-increasing fund-raising efforts. Last year, it cared for more than 2,000 patients and supported more than 6,000 family members, costing it an estimated £6 million, with only 25% covered by the NHS. That is slightly lower than the national average, which is 34% of hospice funding from government sources. More than other hospices therefore, St Peter’s depends on what is raised through donations and its charity shop—the generosity of people in Bristol.

As my hon. Friend the Member for Scunthorpe mentioned, the hospice movement—in particular, through Help for Hospices—has argued for a level playing field in VAT between charities and the NHS, to ensure that donors know that all their funds go towards care services. Clearly, moving more towards charitable providers and away from the NHS will save the state money, at the expense of the big society and because charities are having to pick up the tab. As my hon. Friend mentioned, Sue Ryder estimates that, for every £10 million spent by primary care trusts and the NHS in outsourcing hospices to the third sector, the additional cost burden to the sector will be approximately £400,000 which, as he said, is the equivalent of the cost of 40,000 hours of care.

Can the Minister tell us whether the Treasury has had any discussions with the Department of Health about the VAT implications for different service providers and preferred contracts? Obviously, there is a balance to be struck between protecting the Treasury’s revenue and a charity’s limited budget, but surely the Exchequer Secretary agrees that expecting charities to pick up the tab when stepping into the shoes of NHS providers would be unfair. In May, the Exchequer Secretary told the House that, having met with my hon. Friend the Member for Scunthorpe and people working in the hospice sector, his officials were exploring possible options to resolve this. I understand that Sue Ryder has offered a number of cost-neutral solutions to the Treasury. Can he update the Committee on the Treasury’s dialogue with the hospices and tell us what options are under active consideration?

Photo of David Gauke David Gauke The Exchequer Secretary

First, I congratulate the hon. Member for Scunthorpe on securing this debate—it feels somewhat like an Adjournment debate—or, rather, on raising the issue under new clause 2, as well as in a ten-minute rule Bill and by participating in Adjournment debates. As he said, we met, along with my hon. Friend the Member for Leeds North West (Greg Mulholland) and representatives of Sue Ryder, to discuss the matter.

I also thank the hon. Member for Scunthorpe for his kind words on my role. I want to start by reiterating that the Government appreciate the value and contribution of charities to a wide spectrum of society. We are well aware of the concerns in the charity sector and among a large number of hon. Members in all parts of the House about the potential for the VAT system to act as a barrier to public sector reform. We take such concerns seriously, and have committed to maintaining the dialogue with the charity sector, so that we can explore any viable options.

It might be helpful to remind hon. Members of the current position with regard to VAT and the constraints under which we act. VAT is a broad-based tax levied on final consumption; it is charged by registered businesses on their supplies and can be recovered if the purchase is destined for use in the making of supplies that carry VAT. In that respect, if in business, charities are no different from others. They can and do reclaim VAT when it relates to purchases used to make taxable business supplies, but they are unable to recover VAT on purchases used to make exempt supplies.

Charities already benefit from a number of VAT zero rates and exemptions. The Government recognise how valuable those reliefs are to the charity sector, and we are committed to retaining them. The existing VAT zero rates for charities provide them with a benefit of about £200 million each year, while our total reliefs for charities—including gift aid—are worth more than £3 billion a year. Budget 2011 announced the most radical and generous reforms to charitable giving for 20 years, including changes to inheritance tax and gift aid, and 100,000 charities will benefit from those to the tune of £600 million.

We need to look at the system to ensure that VAT does not act as a barrier to the reform of public services, as I have said. Concerns have been expressed about the impact of irrecoverable VAT on charities when they take over certain services, for example from the NHS,  and how that can be mitigated. One idea is a refund system, or arrangements similar to those that apply to the NHS. The NHS is able to recover the portion of its VAT costs that relate directly to outsourced services that are used in the provision of free health care, such as cleaning, laundry, catering and estate management. That ability to reclaim some VAT costs is taken into account as part of the overall funding arrangements for the NHS. Refunds do not extend to VAT paid on goods and services that are purchased to support VAT-exempt business activities, such as private health care. The scheme is not part of the VAT system itself, but it is a public spending measure. The VAT refunds that are paid are funding equivalent to the VAT that is incurred, and they are a matter of Government expenditure rather than taxation.

In principle, it would be possible to introduce a measure to deliver refunds of VAT to charities in respect of their non-business activities, but any refund scheme would need to be fair, targeted and affordable within agreed funding agreements. Any solution would be constrained by the obligations that are placed on the Government to ensure that the VAT system is fiscally neutral and does not distort competition. We would need to continue to apply the mandatory exemptions, such as those that relate to health care, with the associated restriction on input tax recovery. A further difficulty means that it would not be possible to refund VAT that is incurred on activities where charities are in direct competition with private sector organisations, such as in the supply of care and welfare services, because that would represent an unfair distortion of competition.

I trust that hon. Members will understand that the position is complex. The Government recognise and understand all the issues that have been raised by the charity sector, and we have already given a commitment to review the problems that are faced by certain charities when they undertake to deliver public services that were previously provided by a public body. That was also recognised in the spending review when we announced a transition fund that makes £100 million available to charities, voluntary organisations and social enterprises that are delivering front-line services and that are affected by reductions in public spending.

On the question of VAT, my officials are already working with representatives from the charity sector to explore the matter, taking into account the legal limitations and the potential complexity of any possible solutions. Since my meeting with the hon. Member for Scunthorpe and Sue Ryder, officials have met representatives from Sue Ryder and its advisers. They have presented some proposals, which have been discussed. At the moment, officials are waiting for further representations from Sue Ryder and its advisers to take the options further. At this point, I do not think that it would be appropriate for me to try to set out all the details in this rather complex area, but I assure the hon. Member for Scunthorpe, and the Committee, that we are looking at a number of detailed proposals.

Photo of Kerry McCarthy Kerry McCarthy Shadow Minister (Treasury) 2:30 pm, 9th June 2011

Does the Minister think that he will be in a position to bring forward something on Report? I accept that that is only a couple of weeks away, but might it be possible to amend the Bill at that stage to reflect the discussions that have taken place with Sue Ryder?

Photo of David Gauke David Gauke The Exchequer Secretary

To be honest, I do not think that that timetable is realistic. Any change in this area would need to be properly consulted on and explored to avoid any unintended consequences, because this is a complex area. Let me assure the Committee that the Government remain sympathetic to some of the concerns that have been raised. We want to ensure that VAT does not become a barrier to the type of public sector reform that we all want. We do not want VAT to get in the way of the work of charities. We heard in particular about hospices and we all recognise the valuable role that they can play. I appreciate that the hon. Member for Scunthorpe tabled the new clause to probe the Government. He said that he would not press it, but the Committee is grateful to him for giving us an opportunity to explore this issue once again. I hope that he will take some comfort from my assurances that officials are continuing to engage in this matter. I hope that this is something that will be ultimately productive.

Photo of Nicholas Dakin Nicholas Dakin Labour, Scunthorpe

In the week before carers’ week it is worth quoting Emily Holzhausen, the policy director of Carers UK who said:

“The big society doesn’t come for free.”

To be fair to the Minister, he fully recognised that in the response to the debate. I welcome his continued commitment to an ongoing dialogue between officials and the charitable organisations on this issue. I welcome his clear statement that VAT should not be a barrier to development in this area. I was pleased to hear his update on the ongoing discussions between his officials and the representatives from Sue Ryder and the charitable sector of hospices. I accept his greater understanding of these issues; it appears that it is very complex, but there appears to be, to use a pun from earlier this afternoon, some steel in his intention in this respect. I welcome that. I beg to ask leave to withdraw the motion.

Clause, by leave, withdrawn.