HMRC have published Tax Avoidance Spotlight 70 ‘VAT grouping structure arrangements used by care providers’, highlighting tax avoidance arrangements used by state-regulated care providers to reclaim VAT.
The arrangements
VAT legislation (VATA 1994, Schedule 9, Group 7) states that the VAT exemption applies to supplies of welfare services made by either:
- A charity.
- A state-regulated care provider that is registered with the Care Quality Commission (CQC) or the equivalent regulatory bodies in Northern Ireland, Scotland and Wales.
The impact for the charity or state-regulated care provider is that they are unable to recover any VAT relating to their exempt supplies of welfare services.
The arrangements covered by Spotlight 70 are intended to work as follows:
- An unregulated entity forms a VAT Group with a state-regulated care provider or charity.
- Existing contracts for welfare services between the regulated body and the local authority or the NHS are transferred to the unregulated provider. New contracts are drawn up with the unregulated care provider.
- The unregulated care provider then sub-contracts the physical provision of welfare services back to the regulated care provider. The facilitation measure provided by VAT grouping (VATA 1994 s.43) means that where services are supplied between members of the same VAT group, they are disregarded for VAT purposes.
- As the supplies of welfare services are being made by an unregulated care provider, they are taxable at the standard rate of VAT.
- The VAT group can reclaim input tax in respect of those taxable supplies. Were it not for this arrangement, the reclaim would be blocked.
HMRC’s view
HMRC consider these specific VAT grouping arrangements to be a form of tax avoidance.
- Where necessary, HMRC will refuse VAT group registration applications that are designed to implement or facilitate these avoidance structures.
- HMRC are launching a programme to review all instances where it is known or suspected that this avoidance arrangement is in operation. During this review, HMRC may request additional information and will assess each case individually.
- Where necessary, HMRC will exercise its Protection of the Revenue powers (VATA 1994 s.43C (1)) to remove the relevant parties from VAT groups.
- Any termination notice issued under these powers will only take effect prospectively once the investigation is complete.
What to do if you are using this arrangement
HMRC recommend that any organisation that is involved in this type of arrangement or has made an incorrect claim for VAT, send an email, including the words ‘VAT grouping’ in the subject field to:
Revenue and Customs Brief 2 (2025)
The publication of this spotlight follows HMRC's release of Revenue and Customs Brief 2 (2025): The use of VAT grouping within the care industry, which covers the same arrangements.
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?
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
HMRC: VAT grouping structure arrangements used by care providers (Spotlight 70)