As you may be aware, following the abolition of Primary Care Trusts, with effect from 1st April 2013 responsibility for the administration of LIFT buildings occupied by GP practices passed to Community Health Partnerships Limited (“CHP”), a company owned by the Department of Health.
Where CHP has issued demands for rent or service charges to GP practices, they have added VAT to the amounts that were previously charged without VAT by PCTs.
CHP originally claimed that the addition of VAT was a consequence of the properties having been transferred into a separate company. This is not the case, as VAT is only applicable to commercial rents if the landlord chooses to elect to make it so. CHP have now issued a “Statement on Value Added Tax for General Practice Tenants”, in which they acknowledge that the addition of VAT is a consequence of CHP having chosen to “opt to tax” the properties in question. The Statement claims that CHP’s reason for doing so was to avoid “a very significant unrecoverable tax bill for the NHS”.
The consequences of the option to tax exercised by CHP will depend on the terms of the lease. It is our understanding of the law that, unless the lease specifically states that the rent and other charges stated therein are inclusive of VAT where applicable, the tenant is required to pay the VAT resulting from an option to tax in addition to the rent and other charges. In respect of GP practices, the effects will be as follows :-
VAT will be added to the rent. Where the practice pays this amount, the cost will therefore increase by 20%. In the case of GMS practices, NHS England should increase the amount that is reimbursed to the practice to cover this cost; GMS practices in this position should contact their Local Area Team to confirm the arrangements for this increase in reimbursements.
For PMS practices, the situation is not so clear, as PMS baselines are often inclusive of premises funding. Where premises funding is separate to the baseline, the practice will be in the same position as GMS practices (see above). However, where the baseline is inclusive of premises funding, NHS England may take a hard line and refuse to increase funding to reflect the VAT on the rent; PMS practices in this position should in the first instance contact their Local Area Team in order to ascertain whether additional funding will be forthcoming.
In many cases, the landlord insures the property and passes on the cost to the tenants (i.e. to GP practices). Technically, this recharge is not a charge for insurance (as the landlord is not insuring the tenants, just passing on the cost) but an additional payment under the lease. Consequently, VAT will be added to the insurance charge. The cost will therefore increase by 20%.
Rates and water charges
If the landlord is liable to pay the rates or water charges and then recharges the tenants, VAT will be added in the same way as for insurance. Recovery of the VAT on the rates or water charges will then be subject to the same considerations as recovery of VAT on the rent (see above). If full reimbursement is not possible, it may be more beneficial to arrange for the Local Authority or water company to assess and bill each tenant individually for rates or charges, as a direct charge to the tenant will not be subject to VAT.
The impact on service charges is a little more complex. The landlord will be able to recover any VAT charged by its supplier but will apply VAT at 20% to the amount that it charges the practice. Where the landlord is paying the full rate of VAT (e.g. to contract cleaners or pest control companies), the net cost to the tenant will not increase. However, where the landlord is paying the reduced rate of 5% (e.g. for heat and light) or no VAT at all (e.g. payments to cleaners employed directly), the net cost to the tenant will increase.
For dispensing practices, which will be registered for VAT, some or all of the additional VAT charge will be recoverable, dependant on the partial exemption fraction.
Should you require further advice in respect of the above and the impact on your practice, please contact Andrew Goddard on 01704 215450.