HMRC have published 'Revenue and Customs Brief 2 (2025): The use of VAT grouping within the care industry', aimed at state-regulated care providers that form a VAT group with a non-state-regulated provider of welfare services.
HMRC believe they have identified an artificial VAT structure within the care industry, involving the recovery of VAT on costs relating to a supply that would normally be exempt.
Background
The structure involves both state-regulated providers of welfare services (typically referred to as 'residential care') and non-state-regulated providers. Non-regulated providers are those not registered with the Care Quality Commission (CQC) or equivalent body.
- The VAT group structure allows the regulated entity to shift contracts to another unregulated entity in the group, interposing it in the supply chain between the state-regulated provider and the local authority or NHS Integrated Care Board to which the supply is made.
- This allows the recovery of VAT on costs that relate to supplies of Welfare services that would otherwise be exempt from VAT.
- Identical supplies made to private individuals remain exempt from VAT.
- HMRC's opinion is that the structure is artificially arranged to gain a tax advantage.
New applications for VAT groups
- HMRC will consider each VAT group registration received and reject the application if they believe it is designed to implement and facilitate these VAT grouping structures.
Existing VAT groups
For those that may be affected:
- HMRC advise that organisations should review their VAT practices and, if necessary, obtain professional advice.
- HMRC have advised that all incidents will be reviewed on a case-by-case basis. If HMRC suspect an artificial arrangement has been implemented within a VAT group, they may:
- Ask for additional information.
- Exercise their Protection of the Revenue powers under s.43C(1) of the VAT Act 1994, and the relevant entity may be removed from the group structure.
- Issue termination notices under the above powers.
Reviews are expected to commence immediately.
Useful guides on this topic
Groups (VAT)
What are the conditions for forming a VAT group? What rules apply once a VAT group is in place?
Health and welfare: VAT
When does reduced rating, zero-rating and VAT exemption apply to services relating to medical care, health and welfare? What are the rules?
Registering for VAT
When should a business register for and charge VAT? What are the VAT registration thresholds? What penalties might HMRC issue for late notification of registration? When do you need to file a VAT return?
Taking over a business (VAT traps)
What do you need to do for VAT purposes if you start to run a similar business to one which operated from the same premises? What if you take over an existing business? What if the business you take over has ceased trading or gone bust?
Tax avoidance schemes
How do you spot tax avoidance schemes? What are the types of schemes available that should be avoided? What disclosure requirements are there? When are tax clearances needed?
DOTAS: Disclosure of tax avoidance schemes
What are the Disclosure of Tax Avoidance Schemes (DOTAS) rules? When should you disclose your use of a tax avoidance scheme? What are the consequences of non-disclosure? How are penalties calculated?
External link
Revenue and Customs Brief 2 (2025): The use of VAT grouping within the care industry