HUNDREDS of disabled and seriously ill people in Scotland who employ full-time professional carers are facing a 20 per cent hike in their care bill after u-turn by the taxman which would see them made liable for VAT.

The shake-up could bankrupt support centres in Lothian and Glasgow which carry out payroll services on behalf of nearly a thousand clients combined if they end up saddled with the increased cost and potentially chased for backdated VAT running into tens of thousands of pounds.

The situation has been condemned by Jeff Adamson, the chair of the Lothian Centre for Inclusive Living, which supports more than 600 clients, including disabled people, parents of severely disabled children, frail elderly and individuals with long-term chronic conditions.

Mr Adamson said: "This punitive imposition of a VAT tax burden would have to be shouldered by organisations like LCIL who exist in order to support individuals, in often very difficult circumstances, live fair and equitable lives.

"In order to meet these extra costs within the constraints of an extremely tight budget, LCIL would have to withdraw, or lessen, other support services critical to the well-being of hundreds of individuals with disabilities across Edinburgh and the Lothian region – not to mention the potential repercussions this may have on the wider picture across the country as a whole. Nobody will gain out of this kind of negative action."

The outcome rests on a test case due to go to court later this year involving Cheshire Centre for Independent Living, which has mounted a legal challenge against HMRC over the VAT change. The Lothian centre's own legal challenge against HMRC has been sisted pending the outcome of the English case.

Management at the LCIL, which began operating in 1991, believe that HMRC's own guidelines on payroll services exempt them from VAT. Its sister centre, the Glasgow Centre for Inclusive Living was told by letter more than a decade ago that it was exempt from VAT, but managers fear that decision could now be reversed and place them in danger of folding if HMRC attempt to claw back the debt.

Both centres offer payroll support for disabled people and those with long term conditions who need to employ personal assistants (PA's) for round-the-clock care and support. The cost of a PA is paid for directly from the individuals' self-directed support packages, funded by local authorities. The arrangement means that the person being cared for becomes an employer, with responsibilities to cover salary, pensions, annual leave, and sick pay. However, as this is highly complex, most use funding from their care package to pay support centres such as LCIL to process payroll on their behalf and provide other advice and support, such as recruitment.

If these support centres are forced to register for VAT for the first time, they will have to choose between absorbing the extra cost or pass it on to clients by charging them 20 per cent more.

Etienne d'Aboville, chief executive of the Glasgow Centre for Inclusive Living said: "If HMRC starts to charge VAT on this kind of support, they will simply be adding to the existing crisis in social care funding.

"People’s individual budgets are most unlikely to be increased to compensate and this will leave many disabled people faced with the choice of reducing the amount of vital day to day support they can afford, or switching to a less empowering and often less cost effective form of funding. In practice, charging VAT would simply recycle public monies back to the Exchequer – it would very clearly be another de facto cut in services to disabled people."

A spokesman for HMRC said: "We don't comment on identifiable taxpayers or businesses.

"Welfare services which are directly connected with the provision of promote care, treatment or instruction designed to promote the physical or mental welfare of elderly, sick, distressed or disabled persons are VAT exempt. Therefore the supplies of care provided by an individual’s chosen carer would be exempt from VAT if they are supplied by specified providers.

"HMRC do not view the supplies of payroll and financial administration services in connection with direct payment and independent living schemes as welfare services and these have always been standard-rated."