HMRC clarifies its distinction between a care home and a hospital


Written by: Alan Pearce

Following a recent ruling in the First Tier Tribunal, HMRC has been forced to review its policy on what constitutes the construction and sale of a care home as opposed to a building regarded as a hospital.

The construction services and first grant of a major interest in a residential care home is zero rated for VAT, while a new hospital building is subject to the standard rate VAT at 20%.


HMRC sought to argue that if a building is equipped to improve or prevent the worsening of its residents’ illnesses then it was acting as a hospital and failed to benefit from the zero-rate relief.


The Tribunal disagreed concluding that residential care goes beyond basic needs and that the provision of specialist health related services would not necessarily mean a care home becomes a hospital or similar institution.

HMRC has now issued guidance on their revised policy which provides two major indicators where they are prepared to accept zero rating. Firstly, hospitals aim to treat patients quickly and discharge them, whereas a care home provides lengthy periods of medical care for people suffering from long term conditions. Secondly, hospitals deal with injuries, illnesses and health conditions that require medical or clinical intervention and rely primarily on qualified staff to carry out its provision of health care. In contrast, a care home provides personal care with the main purpose of enabling a person to look after themselves. However, personal care can involve a high level of medical treatment and if this is essential to the residential accommodation being provided within the building then zero rating for the construction and first sale of that building should not be jeopardised.


HMRC has also clarified that specialist treatment centres comprised in separate buildings, or in a distinct part of a building, will also benefit from zero rating provided it is used solely (or at least 95%) by the residents of a care home.


Care homes that have incorrectly incurred VAT under HMRC’s previous policy may now be able to recover this retrospectively.