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Changes to Rent Reimbursement: The Opportunities and Threats

New NHS GMS Premises Costs directions came into effect in April 2013. Some of the changes represent potential opportunities for practices seeking to optimise their profits.

  1. Private income no longer needs to be declared. The well-known ‘90% rule’ has been abolished, so rent reimbursement will not be abated by income from private patients or commercial contracts earned alongside NHS income. The  Department of Health has said that they may look at practices with “high levels” of private income with a view to abatement, but there are no specific provisions in the directions to that effect.
  2. There are still many practices tied in to older mortgages with high interest rates and expensive early repayment/breakage  clauses. These look particularly onerous in the current economic environment, but the new regulations permit NHS England to reimburse the cost of moving to cheaper and more flexible  mortgages. This is a good opportunity to resolve one of the long-standing  anomalies associated with surgery financing.
  3. Premises improvement grants can be sought for a broader set of projects. NHS England has the discretion to provide grants for projects as diverse as infection control, new flooring, water meter installations, electronic storage facilities and connection to an emergency generator. Unfortunately improvements designed to reduce environmental impact will no longer be considered, so this is an example of how “apply now while stocks last” can apply to premises grants.

Other changes are clearly intended to more closely control public expenditure:

  1. NHS England is now forbidden from providing financial assistance unless development and improvement work has been pre-approved. Attempts to seek retrospective approval and funding for changes to surgeries can expect to be rejected. Practices would be well advised to seek qualified professional assistance whilst plans for the surgery are still in the conceptual stage, as signing a contract or starting work will cause funding issues. This is true of most changes to the surgery, including sale and leaseback transactions.
  2. If a development is part funded by NHS England, rent reimbursement will be abated as before, but now the abatement period depends on the value of the investment and can be up to 15 years instead of the previous 10 years. If the building ceases to be used for NHS services during this time, practices can expect to repay a proportion of the funding.
  3. Professional fees for surveyors, architects and engineers are now capped at 12% of the contract sum. Funding remains available for reasonable legal fees, and a new funding category for Project Management is permitted worth up to 1% of the contract sum. We work closely with these other specialist professionals, and can make introductions where needed.
  4. Whilst funding and reimbursement can still be uplifted to include  VAT where this is payable, the rules now clearly require an abatement for any VAT which can be recovered. Practices which are VAT registered should be particularly aware of this change. It remains to be seen whether the NHS will encourage a Practice to become VAT registered in circumstances where it’s landlord has opted to tax VAT on the surgery premises.
  5. Tenants will now need to negotiate and agree rent reviews with their landlord before seeking guidance on the level of rent reimbursement from NHS England and the DV.  This creates a very real danger of a disconnect between the rent agreed between the landlord and  tenant as recorded in a rent review memorandum,  and the level then approved for reimbursement by the NHS.  We strongly recommend that any tenants facing rent reviews seek professional advice at the earliest opportunity, and certainly before signing anything setting out the revised rent or changes to the lease terms.

Readers should note that this article relates only to funding in England. Separate funding directions exist for Wales, Scotland & Northern Ireland.

Posted on October 7th 2013 in News and Publications, Newsletters

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