VAT grouping is a normal, long-standing part of the VAT system, but HMRC has warned that one specific way of using it in the care sector is, in its view, tax avoidance. In Spotlight 70, HMRC set out its concern about care home VAT structures that insert an unregulated company into the supply chain to turn exempt care into taxable supplies and recover VAT that would not otherwise be recoverable. This piece explains what VAT grouping is, why the issue arises in care, and what providers should review now.
What is VAT grouping?
VAT grouping lets two or more eligible persons be treated as a single taxable person for VAT. One member, the representative member, files a single VAT return for the whole group, and supplies between group members are normally disregarded for VAT (VAT Notice 700/2). To be in a group, each body must be established or have a fixed establishment in the UK and be under common control, and all members are jointly and severally liable for the group's VAT debts.
Used in the ordinary way, this is an administrative simplification. Related companies register once, account for VAT once, and do not have to raise VAT invoices to each other. That is the legitimate purpose the rules were designed for, and it is not what HMRC is challenging.
Why does VAT grouping matter in the care sector?
Care is largely VAT-exempt. Welfare services supplied by a state-regulated provider, for example one registered with the Care Quality Commission, are exempt from VAT. Exemption sounds helpful, but it has a cost: no VAT is charged to the local authority or NHS body, and the provider cannot recover the VAT it pays on its own costs, such as agency staff, maintenance, equipment and professional fees. That irrecoverable VAT is a real expense for care businesses, which is why structures aimed at recovering it have grown up. The tension between exempt income and unrecoverable input VAT is the whole reason these arrangements exist.
What arrangement did HMRC challenge?
The arrangement in Spotlight 70 works by changing who makes the supply. An unregulated company (one not itself state-regulated for welfare services) is inserted into the supply chain between the regulated provider and the local authority or NHS Integrated Care Board. The existing contracts are transferred to the unregulated company, which then subcontracts the actual care back to the regulated provider. The two sit in the same VAT group.
Because the supply to the local authority now comes from an unregulated entity, the argument runs that it is taxable rather than exempt. The VAT group can then recover VAT on its costs. The table below sets out the contrast.
| Feature | Ordinary VAT group | Arrangement HMRC challenges |
|---|---|---|
| Who supplies the local authority or NHS | The state-regulated provider | An unregulated company in the same group |
| VAT liability of that supply | Exempt welfare service | Treated as taxable |
| VAT recovery on costs | Blocked, because supplies are exempt | Claimed, because supplies are treated as taxable |
| HMRC's view | Legitimate simplification | Tax avoidance (Spotlight 70) |
Why does HMRC call it tax avoidance?
HMRC's position is that the structure exists mainly to convert exempt welfare supplies into taxable ones so that input VAT becomes recoverable, rather than to reflect any real change in who provides the care. The regulated provider still delivers the service; only the paperwork moves. HMRC therefore regards these specific VAT grouping arrangements as a form of tax avoidance and says it will use its powers to protect the revenue. That includes refusing VAT group registration applications designed to implement or facilitate the structures, and using its Protection of the Revenue powers under section 43C(1) VATA 1994 to remove parties from a VAT group where appropriate. HMRC has said it is reviewing all cases where it knows or suspects the arrangement is in operation, assessing each case individually and asking for further information.
What should care providers do now?
If your group includes an unregulated entity that contracts with a local authority or NHS body and recovers VAT on welfare costs, it is worth reviewing the position carefully. Points to check include: how your contracts are structured and who actually holds them; whether your VAT recovery depends on supplies being treated as taxable; what your adviser told you when the structure was set up; and whether any VAT group registration applications are outstanding. Where HMRC opens a review it may issue assessments for VAT it considers was over-recovered, so understanding your exposure early matters. Our tax investigations team can review an existing arrangement and deal with HMRC on your behalf, and where an enquiry becomes a serious civil fraud matter, our Code of Practice 9 work covers that ground.
Frequently Asked Questions
No. VAT grouping is a standard facility set out in VAT Notice 700/2. It lets related bodies account for VAT as a single taxable person. HMRC is challenging one specific use of it in the care sector, not grouping in general.
Welfare services supplied by a state-regulated provider are exempt from VAT. That means no VAT is charged on the care, but the provider also cannot recover the VAT on its own costs. This irrecoverable VAT is what the challenged structures were designed to recover.
In Spotlight 70, HMRC says it will review known and suspected cases individually, refuse group registration applications designed to facilitate the structures, and use its powers under section 43C(1) VATA 1994 to remove parties from a VAT group where needed.
Where HMRC reviews an arrangement it considers to be avoidance, it may assess for VAT it believes was over-recovered. Your position depends on how your contracts and group are structured, so it is worth taking a professional review before HMRC makes contact.
If you run a care business and use, or are considering, a VAT grouping structure of this kind, it is worth having it reviewed before HMRC gets in touch. Call us on 020 8554 2135 or email info@visionconsulting.co.uk, or use our contact page, and we can talk through your position.
By the Vision Consulting team.
This is general information, not advice. Your position depends on your circumstances.