HMRC has published a brief setting out its revised policy on the VAT zero rate for new buildings intended for use solely as care homes, following a series of legal cases turning on this issue
The most recent involved a specialist mental health residential unit which was refused zero rating for the construction services and materials for a new facility. At a First Tier Tribunal (FTT) HMRC sought to argue that the unit was intended as a hospital, and so standard-rated for VAT [Pennine Care NHS Trust and the Commissioners for Her Majesty’s Revenue and  UKFTT 0222 TC04998].
HMRC’s argument was that although a significant part of what the unit does is equip residents with life skills for the future, there was also an element of improving or prevent worsening of their illnesses, which meant it was acting as a hospital.
However, HMRC lost the appeal, with the FTT judge noting: ‘We concluded that “personal care” is a term that must reflect current times; it may go beyond the basics of feeding and washing and, in our view, in the context of mental health illness the inclusion of the type of bespoke and specialist care provided by the unit does not trespass into the arena of a “hospital or similar institution”.’
HMRC has now issued a new brief designed to explain the distinction between buildings used as care homes (and similar facilities) which are eligible for zero rating and hospitals which are not.
A care home is defined one that provides residential accommodation with personal care to people in need of such care. Care may be needed because of old age, disability, past or present dependence on alcohol or drugs, or past or present mental disorder.
HMRC draws two differences between care homes and hospitals. The first is that hospitals aim to treat patients quickly and then discharge them, whereas care homes allow lengthy periods of residence for individuals suffering from conditions that need longer term care.
Secondly, hospitals deal with injuries, illnesses and conditions that need medicinal or clinical intervention and rely on staff with the appropriate qualifications to carry out these functions. In contrast, care homes provide personal care that tends to be for the purpose of enabling a person to look after themselves.
In its guidance following the decision in Pennine, HMRC says it has reviewed its policy with regard to the VAT treatment of the construction or first grant of new care homes. It accepts that personal care may go beyond a supportive and supervisory role to assist with living. The term may include both therapeutic and clinical treatment that can alleviate or improve the condition of the individual. When determining whether an institution is a care home or a hospital, HMRC will now consider whether there is provision for a person to be in residence for a lengthy period.
Personal care may incorporate a high level of medical treatment if it is essential to the accommodation that’s being provided. Care homes, as distinct from hospitals, may be set up to offer an extended period of in-house treatment or to offer treatment that assists recovery or rehabilitation.
A care home may have a treatment centre that occupies a building, or a distinct part of a building. The treatment centre will be subject to zero rating if it is to be used solely for the residents of the care home - used 95% or more by those residents. If it is used more than 5% by non-residents of the care home, the zero rate will not apply to its construction or first grant of a major interest (freehold or long lease over 21 years or 20 years in Scotland).
Care homes which have previously incurred VAT on supplies used to build a new care home or convert a building, that they believe would have been eligible for zero rating under the revised policy, may be able to recover the overpaid VAT. HMRC’s policy paper provides guidance on the process for this.
Pennine Care NHS Trust and the Commissioners for Her Majesty’s Revenue and  UKFTT 0222 TC04998 is here.
Policy paper Revenue and Customs Brief 2 (2017): VAT - care homes and hospitals is here.