The House of Lords has passed an amendment to the Health and Social Care Bill requiring the government to produce a report on the VAT treatment of charities that provide healthcare on behalf of the NHS.
The amendment to the bill, which will implement the government’s health reforms, was proposed by Lord Patel of Bradford, a Labour peer, and passed by 195 votes to 183.
In his speech on the amendment in the Lords, he said it was unfair that charities providing healthcare services could not reclaim much of the VAT they pay, whereas NHS organisations providing identical services could.
The bill must still go through several more stages in the Commons and the Lords, which means the government will have the opportunity to remove the amendment before it becomes law. If it does survive, it will require the government to produce the report within a year of the bill becoming law.
A similar amendment was proposed during the committee stages of the Finance Bill earlier this year, but was voted down.
"A major inequality exists with respect to irrecoverable VAT for charities providing healthcare services," Patel said. "Under current legislation, when services are transferred from the NHS to the charity sector, there is a VAT gap."
Patel said the Treasury was working with health charities to find a solution to this problem, and he was keen to make sure this issue remained on the agenda.
"We should not expect the charitable sector, and those individuals who give their hard-earned money to support it, to subsidise care that everyone agrees is vital," he said. "We not only ask the sector to continue to provide these services by injecting charitable funds, but we add insult to injury by saying that it should do so without the tax benefits given to the NHS."
Patel said the inequality had been brought to his attention by the social care charity Sue Ryder Care, which said that one of its hospices paid £44,000 a year in irrecoverable VAT. If it had been an NHS organisation providing exactly the same service, this would be only £19,000, he said, a saving of 57 per cent.
Paul Woodward, chief executive of Sue Ryder, said the amendment was a major victory for the sector. "We wholeheartedly support the idea of charities delivering more high-quality, innovative and cost-effective public services," he said. "But this is possible only if we are afforded the same VAT benefits as the NHS and local authorities are given."