We were recently asked to consider the question of how level the playing field really is between NHS and non-NHS providers bidding for NHS contracts. The question arose because NHS providers can reclaim any VAT they pay when they buy non-healthcare goods and services for the purpose of fulfilling their statutory function of providing healthcare services. Non-NHS providers under contract to the NHS are not so fortunate and so incur a 20% uplift in the cost of any non-healthcare goods and services they buy purely because they cannot reclaim the VAT levied on those purchases.
When bidding for a healthcare services contract a non-NHS provider needs to consider what non-healthcare goods and services it will need to buy in to support the delivery of the healthcare services. If the cost of those non-healthcare goods and services is significant and the non-NHS provider cannot reclaim the VAT levied on them in the same way that a comparable NHS bidder can, how can that be fair? A non-NHS provider’s cost base will be inherently different from that of an NHS provider.
The VAT treatment of NHS providers is in effect an inherent de facto advantage which arises from the current VAT regime. But it is only one of many different elements that would influence a bidder's offer and, where the services are predominantly healthcare, a relatively minor element of the cost structure. There may well be other elements within bidders' cost structures (or other factors) which offer advantages to some bidders over others, but it is not for commissioners to analyse the differences between bidders' respective cost bases and seek to neutralise all of these, as that in itself has the potential to be discriminatory. It is for the Government not commissioners to change the current VAT regime, if it sees fit to do so.
This is one of the issues that Monitor recently considered in its Fair Playing Field Review and actually recommended that the Government review whether public sector providers, including NHS providers, should remain eligible for VAT refunds. However NHS England, in its response to the Fair Playing Field Review, has pointed out that the consequences of such a change in cost between commissioners and providers would have to be reflected in tariff and other funding calculations, with the result that tariff variability would increase and there would be an impact on financial stability for both commissioners and providers. NHS England also pointed out that the overriding consideration must always be that the overall level of spending on patient care is maintained. Thus it did not feel able to support any measure that might result in increased financial instability and the risk of the overall cost of healthcare increasing.