Extra payments from local authorities to care providers

We are aware that local authorities are making extra payments to care providers as a result of the COVID-19 outbreak. This is clearly good news for the sector but how should the extra be treated from a VAT perspective and what, if any effect, does this have on VAT recovery? 

Treatment of Income

The VAT treatment applicable to income received will depend on whether the payment is structured as extra consideration for the supply of services or as a grant.

• The former will result in VAT falling due on the supply if the underlying contract is subject to VAT (e.g. where the service is provided by a trading subsidiary) but exempt where VAT exemption is applicable (where the service is provided by a state regulated entity or a charity). 
• Grant funding is not subject to VAT as does not relate to a supply/activity and so no VAT would fall on any grant funding in either case.

Treatment of Expenditure

Further funding by way of grant does not change the nature or value of the services provided under the contract and so VAT recovery would not be affected. However, under the standard method of partial exemption, where the payment is extra consideration under a contract the VAT recovery of overhead costs would be increased if the contract was taxable but reduced if it is exempt.

Should you have any further questions please do not hesitate to contact Rob Warne or Kieran Smith.