Market leading insight for tax experts
View online issue

Ask an expert: VAT and nursing homes

printer Mail


My client is building a nursing home. It will not be a charity, as my client needs to profit from the business. The question has arisen as to whether the input VAT could be recovered on the construction costs, set-up costs and running costs. I have advised my client that the supply of welfare services is normally an exempt supply, meaning that attributable input VAT cannot be recovered; and that even if the supply were not exempt, output VAT would be chargeable on sales, which would make the nursing home more expensive for customers. Are there any planning points I could propose to my client at this stage?


There are several VAT issues to consider.

Construction works

First, the construction of the nursing home has to be considered and whether the services will be subject to VAT. This should be examined before considering whether input tax is recoverable. If no VAT is chargeable, there is no better position to be in.

The work of constructing a qualifying new nursing home is zero rated under VATA 1994 Sch 8 Group 5 item 2. This would eliminate the VAT on construction costs.

There are, however, some pitfalls to avoid. For example, construction of the new building would only qualify for zero-rating if the building is intended for use solely for a relevant residential purpose, e.g. a nursing home. Additionally, the nursing home must be used for a qualifying ‘relevant residential’ purpose, e.g. providing residential accommodation for those in need of personal care by reason of old age, disablement, past or present dependence on alcohol or drugs, or past or present mental disorder. If the building or part of the building is let or used for a purpose which is not solely for a relevant residential purpose within a period of ten years from the date of its completion, a VAT charge will apply.

Professional fees on construction works

It might also be possible for your client to avert the VAT on professional fees by entering into a design and build agreement with the supplier. The VAT liability of the professional services then falls to be subject to VAT at the same rate as the supply of the building, i.e. the zero rated supply of a relevant residential building.

Alternatively, if a development company could engage the architects, surveyors and contractor and build the nursing home. This company could sell or long-lease the new nursing home to your client. This supply would qualify for zero-rating as the first grant of a major interest in a qualifying relevant residential property, under VATA 1994 Sch 8 Group 5 item 1.

The development company should register for VAT on the basis it will make a zero rated supply to the nursing home of the building. This would enable the company to recover VAT incurred on all costs. Care should be taken that the arrangement is not deemed abusive by HMRC and SDLT issues should also be considered.

Running costs

The costs associated with running a nursing home can also be significant. Unfortunately, if your client’s activity is exempt, see below, there is little that can be done to recover input VAT on such costs.

Welfare exemption

Since 21 March 2002, VATA 1994 Sch 9 Group 7 item 9 has exempted the supply of welfare services (and of goods supplied in connection with those welfare services) by:

(a) charity;

(b) state-regulated private welfare institution (or agency); or

(c) public body.

The first question therefore is whether the supplies by your client will in fact qualify for exemption. It seems likely that your client would fall under (b) above, but your client’s regulatory status must be confirmed.

If your client is not state-regulated, its supplies could be standard rated. Standard-rating supplies of welfare would make it difficult for your client to compete on price if the customers are private individuals. However, any nursing home in this position should consider this if they are providing their services to local authorities, as local authorities are usually able to recover the input VAT on non-business activities under VATA 1994 s 33. Your client would simply pass on the recoverable output VAT charge to the local authority customer, whilst simultaneously being entitled to recover input VAT on all attributable costs.

Registration for state regulation

This reasoning also applies to a nursing home whose application to register for state regulation is still under consideration; its supplies would not qualify for exemption (see HMRC VAT Manuals at Welfare para VATWELF2160).

The possibility here is that the nursing home, to the extent it is permitted to trade, would make standard-rated supplies until it became state-regulated, permitting input VAT to be recovered on supplies attributable to those supplies. When the nursing home becomes state regulated and exemption applies to its supplies, the business must consider the partial exemption rules. It may take advantage of the partial exemption de minimis limits which could provide it with a significant VAT advantage.

Final thoughts

The detail is always important when considering the most VAT-efficient way to structure a client’s business. In this case, the first step is to confirm that the acquisition/construction costs of the nursing home can be zero rated. This will protect the majority of VAT.

If the client is a state-regulated provider of welfare services their supplies will be exempt, but some advantage may be gained prior to registration for state-regulation, particularly under the partial exemption de minimis limits.