Post Covid-19 Financial Sustainability and the VAT Strategy of Contract Restructuring
Given the recent dramatic increases in expenditure and the simultaneous significant reductions in income which the pandemic has wrought, both serving to add to the growing financial crisis which looms within the care sector, the need to address financial stability has never been more pressing. The subject of VAT within health and social care could not be more pertinent than at this time. The Government’s recent ‘break’ in its treatment of VAT on PPE, albeit a temporary measure, has served to highlight the issue further amongst operators, with the importance of sector VAT strategy, as well as the wider policy issues around VAT rating, coming to the fore.
A subject central to our ongoing sector conversation around VAT planning is that of ‘contract restructuring’. The concept is not new to the sector, however, the technical detail of creating an operational VAT group and linking it securely, safely and effectively to the practical implementation through contract novation in a way that optimises the benefits, has been the missing part of the jigsaw. Without the complete package of both restructuring and implementation being securely in place, the process is, at best, unlikely to optimise VAT potential and, at worst, could lead to business exposure in tax, legal and regulatory terms.
However, when correctly structured and implemented, the process has the potential to unlock huge financial gain. It is important to emphasize that there are a number of key points which must be addressed before embarking upon restructuring to ensure that it is robust and secure for any care organisation. Firstly, the entire restructure must be supported by legal, regulatory and tax counsel. Full disclosure to HMRC of the impact of restructuring on a group’s VAT liability must be considered, and any party carrying out such a process must understand, and be fully conversant with, the impact of HMRC’s DOTAS regulations in relation to tax avoidance. This is of paramount importance.
Similarly, although the opportunity is as relevant and significant to the not for profit sector as it is to the private sector, there are additional critical nuances for charities/not for profits that must be understood and applied. Equally, and in the same vein, a restructure without implementation can place a great burden on any operator and drain valuable resources which are needed and better used elsewhere. Restructure and implementation incorporating novation must be addressed hand in hand and simultaneously, as any other approach leaves any operator in danger of falling well short of their objective.
As well as a safe and efficient technical restructure, the crucial element of the process, and that which may have been considered as the ‘missing piece’ of the jigsaw and a stumbling block for operators in the past, is successful and thorough implementation. It is here that we see how our specialist knowledge not just of VAT, but also a thorough understanding of funding streams and a history of positive dialogue and trust with local authorities and CCGs reaps its rewards. Coupled with this, it is our education of finance (purchase and sales ledger) personnel within the care operation, and our training in best practice and billing methodology advice which all combine to make implementation a success. A robust implementation strategy and project management approach which is firmly embedded in the finance function serves to streamline the entire operational fee contracting process.
In an uncertain post Covid-19 operating landscape, the immediate financial uplift available to operators through a sound and well-linked restructuring and implementation incorporating contract novation is of huge significance. We estimate that it is likely to inject an additional £1 billion into the sector if one also considers the potential for retrospective VAT recovery in respect of CAPEX incurred 4 years prior to VAT registration. Even if the ultimate goal
of zero-rated status for the sector is eventually achieved, a combined restructuring and novation compliments and sits well alongside (rather than conflicts with) this aim. In terms of moving towards Post Covid-19 sustainability, the opportunity presented by restructure/novation offers a financially challenged sector a very positive step forward