Has your PCN considered the VAT issues regarding the supply of staff to practices?

Serious consideration now needs to be given to some of the VAT issues arising from the increasing role of the Primary Care Network (PCN).

The VAT issues largely arise when a medical practice member of the PCN uses the funding to make supplies to the other members of the PCN. There is no blanket VAT exemption and so it is necessary to consider the VAT liability of the supplies which are being made. If the total vatable supplies being made by the medical practice (including other miscellaneous vatable income) exceed the VAT registration threshold, the medical practice is liable to register for VAT. The current VAT registration threshold is when taxable supplies exceed £85,000 in any twelve-month period.

There are some short to medium term solutions to ensure that no one medical practice in a PCN exceeds the £85,000 VAT registration threshold. These solutions include a mixture of the following:-

• The provider practice is responsible for and undertakes a VAT exempt clinical delivery, i.e. offers the full clinical service. The Courts have ruled that the provider practice must at all times control and direct the staff performing the clinical delivery.
• The practices share the employment of provider staff across each of their payrolls, so that no one practice exceeds the VAT registration threshold when making a charge for the supply of staff to the other PCN member practices.

• Staff to be used in providing PCN services are jointly employed by all of the member practices of the PCN. The recharge of salary costs under a joint employment arrangement is not a vatable supply.

There are, of course, non-VAT issues arising from the above. For example, joint and several liability issues if staff are jointly employed. Looking forwards, however, the above might be neither appropriate nor feasible if the projected rollout of PCN funding and proposed activities continues. If the rollout continues most PCNs will need, at some point in time, to consider the formation of a separate entity to provide the “shared” activities. The entity could be a more complex company limited by guarantee or it could be a simple company with ordinary share holdings. Either way the company should be able to benefit from the very generous and broad ranging VAT exemption given to cost sharing companies. The UK introduced the cost sharing exemption approximately ten years ago to help relieve the VAT burden where bodies in certain “do good” sectors share costs in order to achieve greater efficiencies.

There are certain basic tests which have to be met such as not distributing profit from the cost sharing entity. However, HMRC have stated that a surplus can be retained in order to meet future expenditure. All that HMRC require is that over a longer period of time the cost sharing group operates on a break-even basis.

It is thought that most PCNs will be able to create and put in place a simple cost sharing entity which qualifies for the VAT exemption. There has been some discussion that the underlying VAT legislation might be changed. However, this might be more difficult than it sounds. Also, there might not be the appetite to change the legislation if there is already a relatively simple long-term solution available.

This article discussed general points and specific advice must in all cases be sought.

Peter has been advising on VAT in the primary care sector since 1992 and has worked jointly with us since the mid-1990s.

If you would like Peter to review the VAT for your PCN, please contact your partner at RBP.