A. There is a VAT exemption for welfare services, including the care of children, but the exemption only applies in limited circumstances. Both the status of the provider and the nature of the supply need to be taken into account.
The supply by a charity, state-regulated private welfare institution or agency or a public body of welfare services is exempt (VATA 1994, Schedule 9, Group 7, item 9).
Welfare services means services which are directly connected with:
- the provision of care, treatment or instruction designed to promote the physical or mental welfare of elderly, sick, distressed or disabled persons.
- the care or protection of children and young persons, or
- the provision of spiritual welfare by a religious institution as part of a course of instruction or a retreat, not being a course or a retreat designed primarily to provide recreation or a holiday, and, in the case of services supplied by a state-regulated private welfare institution, includes only those services in respect of which the institution is so regulated.
(VATA 1994, Schedule 9, Group 7, Note 6).
Your client is not a charity or public body but may be a state-regulated private welfare institution if they are regulated under Ofsted or a similar regulatory body. However, Notice 701/2 states that play centres and activity based clubs that provide services such as football and dancing lessons are not providing exempt supplies of welfare. The predominant aim of the supply is the activity rather than childcare.
Therefore, even if your client is state regulated, their supplies will be standard rated and not exempt, as they are not welfare services.
Your client has clearly identified that recovery of VAT on expenses is an advantage of being VAT registered voluntarily, but this should always be considered against the fact that output tax will be due on all of the company’s dance lessons from the date of registration, and the output tax on the lessons is likely to exceed the input tax recoverable. Also if your client registers later the company will still be entitled to input tax incurred prior to registration under the normal rules. This would allow input tax on goods bought by the company in the four years prior to the date of registration and still on hand, and services in the six months prior to registration, which would include rent over that period.
If you have a query on the VAT exemption for welfare services, or on VAT registration, why not contact the VAT Advice Line on 0844 892 2470 to discuss it. Our team of experts have a wealth of experience and can also provide a written consultancy service at £180 per hour plus VAT.
