News / News analysis: Tax targets

Before foundation trusts have paid a penny of corporation tax on their commercial activities, it seems the whole basis for levying the tax is
to be redrawn to capture more of FTs’ activity.

The change would mean that all profits from income from the private sector would be taxable, while any income sourced from the public sector would be exempt. The moves have raised concerns among foundation trusts and finance directors – not simply because of the anticipated higher tax payments but also out of a belief that the whole concept is flawed.

FTs have always been aware that they would pay corporation tax on profits from commercial activities. At first there were delays while guidelines for calculating liability were drawn up. That guidance was issued in September 2005, but still no tax was collected. Even heavy hints that taxation would begin from April this year proved groundless.

However, now it seems there is growing momentum to get the tax system implemented, albeit on a completely different basis to that originally agreed and set out in the 2005 guidance. The sheer administrative burden associated with the original system is one of the reasons, although FTs dispute whether the new proposals really represent a reduction in workload. Under this initial system, the Treasury needed to apply for an order to disapply the general healthcare tax exemption for commercial activities. However this required a separate order for each specific activity within each specific FT, which the discussion paper claims created a huge burden for FTs, Treasury and HM Revenues and Customs (HMRC).

The other reason claimed to make the change necessary is the desire to have a level playing field between public and private sectors. Exempting certain areas of activity for FTs, along with the original £50,000 de minimis, is now seen as creating unfair competitive advantages.

The HMRC briefed the HFMA’s FT Finance Technical Issues Group on its new thoughts at the beginning of the summer and followed this up with a discussion paper. HMRC has been keen to stress two things. First, there is no intention to subject public healthcare activities to corporation tax. And second, ministers have yet to take any decisions. While the replies to the discussion paper were due in by the end of August, the talking hasn’t stopped and further meetings between HMRC and NHS finance directors are expected.

Prepare to pay more

But what is clear is that FTs can expect to pay more under the new system than they would under the earlier proposals and the system may even be in place for next April ( with first payment in January 2011) – Parliamentary instructions, draft legislation and formal consultation permitting.

Two major changes are proposed in the discussion paper. First, FTs would in future be treated as entities, with all commercial activity assessed for tax in aggregate. This would mean losses in one activity could be offset against profits in another, potentially reducing liability.

In addition, the definition of the word ‘commercial’ would change. The earlier proposals had taken an activity by activity approach – so for instance staff canteens and car parking were expected to be exempt while a commercial laundry, say, would be caught – presuming the profits exceeded the £50,000 threshold. Instead HMRC is proposing a simpler approach – based on the source of funding. Any income received from the private sector would be subject to tax, all income from public sector sources would be exempt.

This would clearly mean that the previously exempt car park income and canteen income, as well as private healthcare and bedside telephone services, would be taxable. HMRC claims the system is attractive because of its simplicity and the minimum burden it would impose on FTs – trusts would only need to identify two broad areas for accounting purposes instead of requiring records to be kept for each separate activity.

Finance directors have welcomed the clear attempt to involve the FT sector in the discussion. But they are less enthusiastic with the thrust of the proposals. ‘Classifying all income from the private sector as subject to tax on the assumption that it will generally equate to commercial activities’ income is flawed and creates many anomalies, as well as increasing the administrative burden,’ said Paul Briddock (pictured above), chairman of the HFMA’s Technical Issues Group. And he added that the taxing of FTs – presuming there was no corresponding uplift to the tariff – would mean less NHS regeneration and reduced expansion of NHS services, as tax is paid rather than ploughed back into patient care.

And if the tariff was uplifted to take account of the increased costs, the circular flow of funds would provide no extra revenues from taxation. (This would also provide advantages for trusts over FTs as both would receive the uplifted tariff, but only FTs would pay corporation tax.)

Perhaps of greatest concern for FTs is the fact that interest receivable would be likely to form the largest part of any tax burden for most FTs. For instance, Chesterfield Royal Hospital, Mr Briddock’s FT, would expect to pay some £550,000 in tax if the new system was applied to its 2007/08 commercial activity profits. Of this some £400,000 would be due to tax on its interest receivable - £400,000 that couldn’t be spent on patient care. Yet Mr Briddock argues that the interest is received on income from patient care activities, which he says is ‘at odds’ with the claim that there was no intention to subject core healthcare activities to tax.

In its briefing paper, the HFMA group also took issue with the broader claim that the proposals would create a level playing field. While it might imply equal treatment for FTs and private providers in terms of corporation tax, it would destroy the level playing field that currently exists between FTs and the rest of the NHS. It added that corporation tax was only one aspect of the level playing field debate. Employers’ pension contributions, tariff plus payments to the private sector and guaranteed payments where activity is not undertaken all currently favoured the private sector. Others suggested the private patient cap (see page 6) was also at odds with the pursuit of a level playing field and pointed out that VAT treatment is also not uniform.

FTs have also raised a range of practical difficulties and hidden costs. Business cases – drafted before the changes – might need to be reconsidered. Private patient contracts would need to be renegotiated so that pricing took account of tax. Ledger systems might need revised coding structures to separate out private and public sector activities. And there might be increasing use of private sector tax specialists.

The core of the current objections remains the difficulty in defining sources of funding as private or public. There are lots of minor uncertainties. Would NHS injury cost recovery scheme income – which has a private source – be liable? Other income of a commercial nature, such as room hire, may not be liable if the service is provided to, say, a local authority or other public sector body but would be if provided to a university or private company. This may seem trivial in the grand scheme of things perhaps, but important if the policy is to be applied consistently and viewed as fair.

But principles and consistency aside, understandably the biggest objection – and the biggest threat to FTs’ bottom line – is the proposed taxation of interest receivable. It is on this issue that the HMRC and Treasury are likely to find the greatest resistance from FTs.