Pictured above: Robert Warne

Care providers are facing a tax twist which may be badly hitting their bottom line.

But Robert Warne, VAT partner at accountants and business advisers Horwath Clark Whitehill, says solutions exist to get round the difficulty.

The issue affects some of the most vulnerable in society.

Mr Warne said: "A number of people buy day care from providers.

"It is paid for by the local authority and individuals who receive help from the Independent Living Fund.

"Payments from the ILF are part of the Government's 'personalisation agenda' where people with learning disabilities, members of the black, minority and ethnic community and others are encouraged to take control of their own lives. Money is given to them to encourage them to buy their own services rather services being provided directly by third parties.

"But the method by which services are been paid for is causing difficulties."

Giving the example of care being required for a week, the local council pays for one day and the recipient (through their guardian or parent) pays for the other four. Both parties are invoiced separately. The fees charged to both are subject to VAT.

Mr Warne went on: "A local authority can reclaim any VAT charged for the day care and it is not a cost to them.

"The recipients have to meet their fees from funding they receive from the ILF. Those who are not financially sophisticated or not properly informed will spend the money without taking into account VAT.

"As the individuals charged fees and VAT are not in business they are not able to recover it and it is a sticking cost to them. If they are refunded for the fee-only by the ILF they will need to find the VAT from their own funds which in many instances may be difficult.

"What happens in fact is they consider they should only pay the net sum. The providers' difficulty is they must account for VAT they are not receiving. If this is the case then margins will be severely cut and the provider might be forced out of business."

But Mr Warne has a solution.

"One way to resolve this issue is for the provider to receive payments directly from the local authority for all services made available to customers. The local authority can then recover all the VAT. But this approach will only work if the local authority contracts with the provider directly and receives the ILF directly and not from the individuals."