PSTAX and leading law firm, Sharpe Pritchard have joined forces to offer local authorities and other public sector care commissioners a vital tax and legal due diligence service to ensure all risks are highlighted ahead of any proposed care contract restructuring driven by private care providers to recover VAT.

Why are we offering a care contract due diligence service?

The pressure facing the care sector is well-known, and the challenges local authorities and their care suppliers face are becoming more acute. One consequence of this is care suppliers approaching local authorities with proposals to restructure their contracts to enable them to reclaim VAT.

It has been a longstanding position that care fees are exempt from VAT to try and keep care fees low. This is good from an end-user perspective, but it also means that operators of care services cannot claim back VAT paid as part of their trading costs, which would otherwise be recoverable for businesses operating in a different sector. Care suppliers that contract with local authorities are becoming increasingly interested in a contract restructuring model designed to allow for the recovery of this VAT.

Benefits of our Care Contract Novation service

One of the many benefits to the providers is that this allows them to reclaim significantly more VAT costs.

Local authorities are typically keen to help care providers manage the increased financial pressures they face now. A care provider might have several reasons for wanting to restructure its operations, one of which is that it can allow them to reclaim significantly more VAT costs.

However, local authorities cannot just agree to the restructuring proposals, as they must operate in a specifical legal framework and meet numerous regulatory, procurement, contractual, tax compliance, and other responsibilities. But if a local authority carries out appropriate due diligence on the proposals, it can meet its responsibilities at the same time as helping providers deal with their increased financial pressures. Our due diligence service allows local authorities to do this in an efficient and timely way.

What does care contract restructuring involve?

The Care Act 2014 does not compel local authorities to contract with entities that the Care Quality Commission regulates. However, this appears to allow a restructuring that sees a new, unregulated company become the contracting party with the local authority, with the new entity then subcontracting the care services to the existing regulated organisation. This organisation still delivers care services on a day-to-day basis, but the contract structure has been altered to permit the recovery of VAT by the new contracting entity.

This restructuring process is complex and does not come without risk from a legal and tax perspective.

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The Risks

Following the restructuring, an unregulated company will supply the local authority with welfare services. The VAT exemption will not apply, and VAT will be charged on the supplies made to the local authority. The intention is for the local authority to reclaim this VAT.

However, a local authority can only recover VAT that is properly charged. HMRC has powers to deny VAT recovery where an arrangement is “abusive”, i.e., artificially structured just to achieve a better VAT position.

A local authority must also operate within a specific legal framework and meet numerous regulatory, procurement, contractual, tax compliance, and other responsibilities.

  • What are the risks to not conducting due diligence for care contract restructuring

    • Public law and vires
    • Contract law (ensuring effective novation and legal, due diligence on the proposed model)
    • Procurement law: variations to existing contracts under Regulation 72 Public Contracts Regulations 2015
    • Contract novation: which type is proposed and how will it treat pre-novation liabilities
    • Legal due diligence and corporate governance
    • The transparency of all proposed legal arrangements
    • The consistency of the subcontract and re-charge/management arrangements
    • Corporate governance
    • Information about the Directors in the new company
    • Effect on contract management
    • Re-alignment of contract escalation processes

Sharpe Pritchard Sharpe Pritchard is a leading law firm with a reputation for delivering high-quality legal services and exceptional client support, which has seen us advise, develop and shape public law since 1826.

One of the pre-eminent firms in the country for Local Government work, routinely sought out by local authorities for both contentious and non-contentious advice on high-profile projects. A substantial number of lawyers in our team were previously employed by local authorities, and several are former heads of legal departments.

Get in touch

If you are interested in our care contract restructuring Due Diligence service, we will be pleased to discuss it further on a free no, obligation basis. We will provide you with more information about how the service will work and how your authority can benefit from assisting its care providers in a way that presents little or no risk across all the affected tax, procurement, legal, and contractual areas.

0345 6861321