The costs associated with heating a care home are substantial and the need for a reliable heating system is paramount given the frailty of elderly residents. In addition many care home buildings were originally built as large Victorian or Edwardian homes which have since been converted in residential care homes. The insulation is often poor and heating costs very high. Some care home operators and particularly those in rural locations which burn oil for heating have taken advantage of biomass boiler technology and substantial government grants called RHI (Renewable Heat Incentives) which run for 20 years.
This technology is now proven and we understand it can reduce fuel costs by about 30% when compared to burning oil. The RHI grant will normally pay for the boiler over 5 or 6 years, leaving about 14 remaining years of RHI income for the care home. Of course this is dependent on the care home following the Ofgem rules which are perhaps not yet as clear as they could be.
Installing biomass boiler technology in care homes makes perfect sense given the high level of heat demand.
The purchase price of a biomass boiler will normally attract VAT at the standard rate of 20%, however, where the biomass boiler is to be used for qualifying residential purposes, such as a residential care home, VAT is charged at 5%. This substantial saving of 15% of the cost price of the boiler is of great value to a care home which typically cannot reclaim any VAT.
Due to Ofgem’s regulations concerning “ownership” of the boiler Arkle advises all our customers who wish to finance a biomass boiler to avoid Leasing. Those using Leasing would not wish to find their RHI income payments ceasing unexpectedly due to a technicality! Although Hire Purchase is the most common type of finance agreement used to funding biomass boilers, this is far from ideal for care homes due to 20% and 5% VAT issue.
When a customer uses Hire Purchase to finance a biomass boiler, the supplier, who is usually also the installer, invoices Arkle Finance Ltd for the boiler and installation costs. Arkle produces a Hire Purchase agreement which is signed by the customer and is then countersigned by Arkle. This Hire Purchase finance agreement also forms the VAT invoice which the customer would normally use to reclaim the VAT from HMRC. Our understanding of HMRC’s view is that Arkle would be the supplier of the boiler but not the installer. This means Arkle and all other finance companies in this scenario should charge VAT at 20% and not 5%. Clearly this is far from ideal for the care home.
However, for those care homes who operate as Limited Companies, there is actually a solution which means the care home can be allowed to take advantage of the reduced VAT rate of 5%. Instead of using a Hire Purchase agreement Arkle provides a simple Loan with security over the boiler in the form of a Chattel Mortgage. In this case the supplier and installer provides the care home with an invoice for the supply and installation of the boiler which includes VAT at 5%. This is the ideal outcome and everyone achieves their objectives including HMRC who do want to provide the user of the boiler system with a lower rate of VAT.