Charities that provide welfare services through a trading subsidiary have suffered a tax setback in Europe.
The Advocate General, who advises the European Court of Justice, has said UK legislation that exempts profit-making welfare services regulated by the Care Standards Act from VAT is not contrary to European Union VAT law.
Charities had been hoping that the EU would overturn the 2002 law, which means that trading subsidiaries delivering regulated care services cannot recover VAT on the costs of providing services. Many charities prefer to be subject to VAT, rather than exempt from it, because this enables them to reclaim VAT on spending.
The Advocate General's opinion will influence the European Court of Justice's decision on the long-running Kingscrest case. A verdict is expected later in the year.
Kingscrest, a charity that operates care homes for children and the elderly, set up a for-profit trading subsidiary to deliver its services. But legislation passed in March 2002 exempted services regulated by the Care Standards Act from VAT. Kingscrest then began litigation, which will shortly be considered by the European Court of Justice.
Carolyn Slaughter, VAT manager at accountants Saffery Champness, said: "If the court's decision matches the Advocate General's opinion, it will underpin current UK legislation."
However, unregulated services delivered by for-profit providers are likely to remain subject to VAT.
A spokeswoman for disability charity John Grooms said the decision could affect the users of welfare services. "We have serious concerns that the implications of this case will act as a disincentive for other service providers to seek regulation. This could leave vulnerable peo-ple receiving services from poor-quality and unregulated providers," she said.