For practices coming together to work in a primary care network (PCN), value added tax (VAT) is a major complication, adding significantly to the administrative burden for both the PCN and its member practices. How PCNs are structured at the outset will be a deciding factor in maximising the potential for VAT exemptions.
GP practices have been encouraged to work together through sharing of back-office functions and staff. This is complicated by VAT considerations.
The supply of health services provided by registered health professionals including doctors are generally exempt from VAT. However, if one practice provides administration support or staff to another then that is a VAT-taxable service because it does not fall within the medical care exemption. Accordingly, if the practice is registered for VAT – because its VAT-able turnover is more than £85,000 a year – it would have to charge an additional 20% to the recipient practice which, at best, can only reclaim a portion from HMRC and only if they themselves are registered for VAT.
VAT can only be reclaimed if a business is VAT registered and delivering VAT-taxable services. A GP practice will probably not be VAT registered unless it is large or dispensing. Even if it is VAT registered, it can’t claim VAT back on costs relating to the delivery of exempt medical care services.
The PCN Directed Enhanced Service (DES)1 creates a new structure for GP practices to work together collaboratively, with funding paid centrally to a nominated practice or federation (if eligible to be a core member by being party to a primary medical services contract and signing up to the DES).
However, this income does not belong to the nominated practice or federation that has received it. It is the income of the network members, paid to a central nominated practice or federation for convenience and held on trust for the members of the PCN in accordance with the network agreement.
Therefore, any network members that are VAT registered will need to include those transactions subject to VAT that take place within the PCN on their own VAT returns – transactions should not be wholly recorded on VAT returns (if applicable) of the nominated member only.
The PCN is not an entity its own right and so cannot itself register for VAT unless it is a single large practice that meets the criteria to be a PCN. A single practice PCN would merely record the transactions in the normal way on its VAT return and is likely to be already registered for VAT by virtue of its size.
Most common models adopted for PCNs will either be a lead provider (practice based) model or an existing federation.
While the medical care exemptions fit comfortably with the supplies GP practices make direct to patients, PCNs under either structure are effectively creating a sub-contract position whereby a supply is made to the practice to make to the patient. This is a situation not immediately envisaged within the scope of the VAT exemptions usually applied to healthcare. This means the lead practice or federation may need to charge VAT to member practices, if it is registered for VAT and providing a VAT-taxable service. If the lead practice or federation is not VAT registered, it must check that the additional income does not tip it over the VAT registration threshold.
Further complications will arise as the varying structures for PCNs become apparent. Specialist VAT advice should be taken by each PCN – what works for one may not work for another.
If a member (be it a practice or federation) supplies services to the PCN, then that member will need to consider if they are making a VAT-able supply to the PCN and its other members.
Providing administration support, equipment and general back office functions does not fall under the medical care exemption, so the lead practice or federation is likely to need to charge VAT at the standard rate for these services, if VAT registered.
If not VAT registered, the member needs to consider if the additional VAT-taxable income will result in them having to register for and charge VAT.
Only one member in the PCN will employ the shared workforce. They will, in effect, therefore charge a portion of the cost of that workforce to the other practices in the PCN.
Depending on how the PCN is structured, payments for staffing costs received from member practices may be subject to VAT.
Unfortunately, while there are a number of VAT exemptions and ways of structuring transactions so they are not within the scope of VAT, no one exemption represents a perfect fit for PCNs.
Additionally, if specific criteria for exemption are not met then the supply reverts to being standard rated. VAT case law has also shown that there is often a fine line between the provision of medical care or welfare services qualifying for VAT exemption and the supply of staff which would be standard rated.
Both practices and PCNs should take their own specific VAT advice to consider how VAT fits within their structure and ensure they are benefiting from available exemptions.
Our firm, MHA Larking Gowen, has outlined VAT aspects of the lead practice model and the GP federation/provider entity model in general guidance that can be found on the BMA website within the Primary Care Network toolkit section. https://www.bma.org.uk/collective-voice/committees/general-practitioners-committee/gpc-england/gp-contract-agreement-england/primary-care-networks
Lizzy Lloyd and Rob Skilton are accountants at MHA Larking Gowen, a member of the Association of Independent Specialist Medical Accountants
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