Hospices (VAT)

Debate between Bob Russell and David Gauke

Tuesday 10th May 2011 Commons Chamber

[The Exchequer Secretary to the Treasury (Mr David Gauke)]

I congratulate the hon. Member for Colchester (Bob Russell) on securing this debate and on speaking with such evident passion and knowledge about the hospices in his constituency and the hospice movement more widely. I think I speak for all Members in expressing a sense of admiration for what the hospice movement does. I certainly know of the fantastic work that a number of hospices perform in my constituency.

I am pleased to have a further opportunity to explain and discuss the Government’s policy on an issue that has generated considerable interest and is evidently of concern to a large number of hon. Members. It might be helpful if I could start by reminding Members of the current position with regard to VAT and the constraints that we are acting under. Before I do so, I would like to confirm how much the Government appreciate the energy and input of charities across a wide spectrum of national life and interests. We can all agree on the important role that they play in our society and agree that we are fortunate that they are prepared to come forward with their immense contribution.

As we all know, VAT is a broad-based tax levied on final consumption. It is charged by registered businesses on their supplies and can be recovered by a business when the purchase is destined for use in the making of supplies that carry VAT. In this respect, charities are no different from others when they are in business, as they can recover VAT. A business, however, bears the VAT on purchases when it is making supplies that are exempt from VAT. Since the supplies it makes do not carry VAT, it is unable to claim back the VAT. Exemption is applicable to a limited range of supplies such as the rent of land and buildings, education and health care. The application of an exemption has to be in line with international agreements—in this case, the principal VAT directive. Since health care is included in the list of exemptions, we are obliged to apply an exemption.

The hon. Gentleman’s central concern is how the impact of VAT on hospices can be mitigated. Ideas that have been mooted include the application of a refund system or arrangements similar to those applying to the NHS. With regard to a refund system, it would, in principle, be possible to introduce such a system in respect of the non-business activities of charities. However, such refunds, as a matter of Government expenditure rather than taxation, would place a very significant cost burden on the Exchequer, especially given the current fiscal position. Furthermore, many charities are engaged in activities where they could be in direct competition with private sector organisations: those activities include the provision of care and welfare services. A refund scheme for VAT incurred in relation to these services would represent a distortion of competition. Any scheme that could be devised would be complex and administratively burdensome for charities to operate.

[Bob Russell]

Will the Minister explain where the competition is in the treatment of cancer patients? That is something new to me; I did not realise that it was in the competitive world.

[Mr Gauke]

I wanted to apply this initially to the broad issue of costs incurred by charities as a whole. Clearly, there can be an issue in the provision of care and welfare services more generally, and I was looking at it in that context rather than specifically with regard to hospices.

It is true that the NHS can recover the portion of its VAT costs that relate directly to out-sourced services used in the provision of free healthcare—for example, cleaning, laundry, catering and estate management. That amounts to about 20% of the total VAT incurred across the NHS. This ability to reclaim some VAT costs is taken into account as part of the overall funding arrangements for the NHS. Refunds do not extend to VAT paid on goods and services purchased to support business activities that are exempt from VAT, such as private health care and property rental.

In addition to the obligation placed on the Government to ensure that the VAT system is fiscally neutral and does not distort competition, it is not within our gift to change unilaterally a VAT system unanimously agreed in Europe and applying in the single market. We need to apply the mandatory exemption in relation to the business supplies of health care providers, with the associated block on recovery. Similarly, under European agreements the Government cannot extend existing VAT zero rates or introduce new ones. Reduced rates can be applied only to a specific list of goods and services, and there is no such reduced rate that applies to all supplies made by all charities.

--- Later in debate ---

[Bob Russell]

It will now.

[Mr Gauke]

As the hon. Member for Colchester has just muttered, it will now. My hon. Friend the Member for Worcester (Mr Walker) has put that thought on the record, and my officials will certainly take it up.

As I said, there is clearly strong feeling in the House on the subject, and rightly so. We all recognise and respect the value of the hospice movement, and we all recognise the opportunities and benefits of a greater diversity of supply of services. We agree that it would be most unfortunate if the workings of the VAT system were to get in the way of sensible progress. I hope that my comments will provide reassurance to the hon. Member for Colchester that we understand the issues that have been raised and that the Government are taking them very seriously. I hope that we can continue to work closely with the hospice movement in developing proposals.

Question put and agreed to.