Private Hospitals

The UK’s private hospitals need to navigate HMRC’s complex rules around partial VAT exemption. While some private healthcare services – namely patient care – are exempt from VAT, other common activities in private hospital do incur VAT.

A detailed VAT review of a private hospital’s activities and processes with analysis by an adviser who has in-depth knowledge of HMRC’s partial exemption methodologies can release significant savings.

An experienced VAT adviser can aid a hospital group in improving the efficiency and effectiveness of a VAT refund claim relating to building projects and high-value, multi-million-pound contracts for outsourced functions.

They can also provide support where there are disputes and disagreements with HMRC about whether a supply or an activity is VAT exempt or not.

The Proactive Consultancy Group works on a fee-on-success basis, taking our fee as a percentage of any refund or savings. We have a 97 per cent success rate, and have recovered more than £120million for our clients.

We can provide an interim service to a hospital finance department that lacks VAT expertise, or we can provide an ongoing service as required.

How We Assist Private Hospitals in Optimising VAT Refunds

Private hospitals often underclaim VAT refunds, partly because the taxation landscape for private healthcare is complex.

The main VAT complexity that we see in our private hospital clients is partial exemption.

Reclaiming VAT on goods and services is key for financial health of any private hospital. However, most healthcare organisations will also have VAT-exempt supplies as well as supplies to which VAT must be applied. This makes their VAT processes more complicated.

Examples of supplies that could generate a taxable income that is not VAT exempt include:

• catering operations
• pharmacy sales
• car parking
• an occupational health unit

If your hospital has any of these, then a VAT review and analysis could help you to reduce VAT leakage.

Outsourced functions are another source of VAT complexity. Some private hospitals treat outsourced functions like catering, IT and facilities management as VAT exempt healthcare activities. But it is not uncommon for an expert VAT review to find that a portion of these outsourced functions supports taxable activities. So these functions can, therefore, generate a VAT refund. And of course, with a high-value contract, the refund can be substantial.

Many private hospitals are missing recoveries from property VAT relating to buildings and refurbishments. The Proactive Consultancy Group helps hospitals to identify whether the VAT was claimed initially by the correct legal entity; and whether the hospital has claimed all recoverable VAT on professional fees.

We can also assist hospital finance departments in navigating Capital Goods Scheme adjustments, and where building use has changed over time.

How Much Can a Private Hospital Benefit from a VAT Review?

A private hospital has refurbished two wings at the cost of £20million. Because most of its turnover is healthcare, which is VAT exempt, the finance team uses a turnover-based methodology to calculate that it can recover 8% of the VAT.

But – a VAT review shows that the two wings are used for quite a few taxable activities:

• a diagnostics unit supports mainly exempt healthcare activities, but also some taxable services
• the cafeteria generates a taxable income
• an underground carpark generates a taxable income for the hospital
• an occupational therapy unit makes a taxable income

This suggests that the standard turnover-based method is not appropriate. The finance team gets HMRC approval for a more use-based methodology, which increases recovery substantially.

With a major capital project that has run to several million pounds, a VAT review could see the recovery percentage increasing from 8% to 15%, which could produce a six or seven-figure benefit.

VAT Disputes in Private Healthcare

When HMRC challenges a private hospital’s VAT payments or recovery claims, we can provide guidance and reassurance.

An example of a dispute that might arise in a healthcare environment is over whether certain activities are exempt or taxable. Healthcare activities that are intended to protect, restore or maintain health are exempt from VAT. But some operations procedures, and treatments that private hospital patients undergo, particularly those for cosmetic reasons, may be taxable.

Recently, a healthcare provider came before the Upper Tribunal appealing HMRC’s decision to treat a new building as a hospital, and therefore excluded from zero-rated VAT treatment. The healthcare provider considered the building to be residential and held that no VAT should be charged on the construction costs. HMRC won, and the healthcare provider had to pay VAT.

Our consultants can assist where HMRC and a private hospital have a difference in interpretation relating to exemptions or other VAT guidance.

We can also support private hospitals through HMRC investigations. The Proactive Consultancy Group works with trusted partners in law and accountancy firms so during an HMRC dispute, we will be by your side the whole way.