An important VAT update from HMRC for care providers
Jonathan Main · Posted on: April 25th 2025 · read
Who should read this
If you are a state regulated provider of care services, please read on.
What has changed?
HMRC issued Revenue & Customs Brief (“RCB”) 02/25 on 24 April 2025. The RCB makes it clear that HMRC no longer accept the efficacy of longstanding VAT planning in the care sector.
Please follow the link to the RCB here: Revenue-and-customs-brief-2-2025-the-use-of-vat-grouping-within-the-care-industry
The arrangements highlighted by HMRC
HMRC state that the following structuring constitutes tax avoidance:
“HMRC has identified a growing use of VAT grouping structures by state-regulated care providers to recover VAT on costs that relate to supplies of welfare services that would otherwise be exempt from VAT.
These structures incorporate an unregulated entity into the supply chain between the state-regulated provider and the local authority or NHS ICB (integrated care board) to which the supply is made. Identical supplies made to private individuals remain exempt from VAT.”
The RCB focusses on the Care Quality Commission (or devolved equivalent) as the state regulator. We assume that HMRC would also challenge arrangements with Ofsted (or devolved equivalent) as the state regulator.
HMRC actions
HMRC will use existing powers to refuse new applications for VAT grouping and to remove entities from VAT groups. These actions would make the planning ineffective.
In addition, the RCB includes an instruction to contact HMRC if businesses believe they have similar arrangements in place.
Any actions by HMRC which are restricted to the powers highlighted in this RCB will not have retrospective effect.
What does this mean for my business?
The context matters in this case. This planning is not new, is well known to HMRC, and in numerous cases has either been approved in writing by HMRC or been reviewed during a routine VAT inspection. It is not clear what has triggered HMRC to challenge the planning now.
If you decide to notify HMRC and you are confident that the arrangements have been implemented correctly, you should not expect any historical VAT savings to be at risk. Conversely, if you decide to wait for a challenge, HMRC may be less sympathetic to the arrangements in place, although the powers outlined in the RCB indicate that any action will be on a prospective basis.
The RCB also restates HMRC’s view of tax avoidance in the following terms,
“if you’re involved in a tax avoidance scheme HMRC will fully investigate your tax affairs and may treat you as a high-risk taxpayer. This means HMRC will closely inspect all of your tax affairs in future, not just your use of the avoidance scheme.”
In summary, this is a finely balanced judgement, based on the business’ attitude to risk, the effectiveness of arrangements in place, and concern about the closer attention of HMRC.
How can we help?
We have the expertise you need to support your review of existing business relationships with local authorities and the NHS and decide how best to move forward.
