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Paying for the middle man

NHS commissioners might not have learnt their lessons following the spectacular collapse of the UnitingCare contract in 2015, just months after it started.

In its review of the debacle in Cambridgeshire, NHS England pointed out that VAT was an issue for UnitingCare (a company formed by two foundation trusts) because it was “outside the NHS VAT group”. As the trusts had formed a separate legal entity to bid for the contact, this new company would not be able to recover VAT on certain services. Neither the providers nor the clinical commissioning group anticipated this – which led to a huge and unexpected VAT bill.

The review made clear that for “any future contract the current VAT rules should be applied consistently and factored into the bid”.

But it seems commissioners and providers in east Staffordshire also failed to anticipate a VAT storm brewing when awarding a £270m “prime provider” contract to Virgin Care, in 2015.

Perhaps they missed NHSE’s memo.

The organisation bracing itself, however, is not East Staffordshire CCG or Virgin Care, but Burton Hospitals FT – which had to pay almost £300,000 in VAT in 2016-17 on the services it was commissioned to deliver by Virgin as part of the contract.

A little background: in 2015 Virgin Care was awarded a prime provider contract by East Staffordshire CCG. The aim of this contract was for Virgin to act as an “integrator” of community services and had therefore took on some commissioning responsibilities.

However, a key thing that seems to have been missed by commissioners is that any trust commissioned by Virgin as part of the contract would have to pay VAT on any services they deliver for the company.

Why?

Essentially the trust is “selling” a service to Virgin, which, as a private provider, is not included in the NHS VAT group.

When a trust sells a service to any company outside of the group it is required to charge and pay VAT on some services.

If East Staffordshire CCG had commissioned services directly from the trust, rather than through Virgin, the trust would not have to pay VAT as CCGs are included in the group.

It’s worth noting that VAT is not applicable on all services Virgin commission from Burton, just those that fall outside of the list specified by HM Revenue & Customs.

The £300,000 is not an insignificant amount and considering Virgin’s contract is for seven years, the financial burden on Burton by the end of it could be considerable – this financial year VAT costs are expected to rise to £400,000.

HMRC has been clear with the trust that it must pay the VAT, and with both Virgin and the CCG refusing to compensate, the trust will have no choice but to swallow the cost.

The key question is why were these charges not anticipated from the outset and built into the contract during procurement?