📊 Unpacking the VAT Novation Crackdown in Health and Social Care Contracts
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Unpacking the VAT Novation Rules for Health & Social Care Contracts
Understand the latest HMRC stance on VAT novation, why it’s being unwound, and how providers can respond strategically.
📌 What Is VAT Novation?
VAT novation was a contractual workaround used in some local authority and NHS contracts to allow VAT to be reclaimed by providers, despite the core service being VAT-exempt. Under novation, a contract would be transferred mid-process — often via a managed company — enabling VAT recovery as if the service were taxable.
🚨 Why Is It Now Being Scrutinised?
HMRC has issued updated guidance confirming that many VAT novation structures are now classed as a form of tax avoidance. The practice is being unwound nationally, especially in social care and health frameworks, where some councils previously relied on it to enable providers to claim VAT.
While novation offered financial flexibility in a challenging market, HMRC’s position is that such schemes artificially distort the tax system and create risk for both authorities and providers.
🔍 What HMRC Has Said
- No backdated VAT liabilities will apply to providers who acted in good faith.
- VAT reclaims cannot be reversed or denied unless the contract is formally unwound.
- Attempting to apply retrospective liability would breach VAT law.
However, confusion remains — some commissioners are mistakenly threatening clawbacks or suggesting providers must repay VAT already claimed. It’s vital for providers to know their rights and refer directly to HMRC's current guidance if challenged.
📉 What This Means for Providers
As novation ends, providers will see an increase in net delivery costs — with fewer options to reclaim VAT on staff, agency fees, or subcontracted services. This has direct financial implications for providers operating on tight margins.
Authorities are expected to revise contract terms and uplift fees accordingly, but in practice, this will vary widely. Smaller providers may find themselves absorbing costs unless they negotiate or raise concerns proactively.
🛡️ What You Can Do
- 📁 Review all contracts that involve novation structures and seek clarity from commissioning bodies.
- 💬 Engage early with finance leads and bid writers when renegotiating terms or responding to tenders.
- 📈 Factor VAT changes into pricing models, especially on longer-term frameworks.
- 📄 Keep documentation from your original VAT position — including HMRC correspondence — in case of dispute.
🔗 Why This Matters
This issue is more than a tax technicality — it affects sustainability, viability, and your ability to grow through contracts. Understanding where VAT novation applies (or no longer does) helps you remain compliant and competitive.
🧭 How Impact Guru Can Help
We support providers in navigating the complex landscape of contract compliance, tender pricing, and strategic bid writing. If you need help reviewing a framework, responding to new VAT conditions, or aligning your documentation with regulatory expectations — we’re here for you.
Written by Mike Harrison, Founder of Impact Guru Ltd — specialists in bid writing and strategy for social care providers
Visit impact-guru.co.uk to browse downloadable strategies, method statements, or get in touch about tender support.