HMRC announce changes to VAT grouping policy in care sector

Many Care Providers have used a planning tool, which utilises a separate entity, which is not regulated by the CQC to provide care to residents funded by Local Authorities or Integrated Care Boards. By inserting a non-regulated provider the services supplied become subject to VAT, which the LA or ICB can recover, but crucially the care provider is then able to claim back VAT on their costs.

The structure generally makes use of a VAT group registration. The HMRC brief states that they consider these structures to be a form of tax avoidance and will take steps to prevent any further VAT group registrations and also review and disband existing arrangements.

Care providers are required to be regulated by the Care Quality Commission and VAT regulations make fees for the provision of care by a regulated provider exempt from VAT. VAT on costs can be claimed back by businesses which sell services and charge VAT on their fees, but not if the fees are exempt from VAT. This means that care providers pay VAT on many of their costs and are not able to claim it back.

By arranging for fees to be charged by a non-regulated provider, care home operators have been able to claim back VAT on their costs. Statutory bodies, such as local authorities and NHS bodies are able to claim back VAT on the fees from the providers, even if they are not using them for business purposes. Fees funded privately are still charged by the regulated entity, exempt from VAT. The regulated and non-regulated entities are registered together as a VAT Group, and able to claim back VAT based on the proportion of the non-regulated fee income.

The Business Brief says that ‘HMRC consider these VAT grouping structures to be a form of tax avoidance’ and that they intend to take action to protect VAT revenues. This will include refusing new VAT group registration applications and reviewing and investigating instances of suspected avoidance.

The UK total VAT receipts for 2023-2024 were £168 billion, which was £9.5 billion lower than it theoretically should have been. HMRC have an obligation to collect tax and protect the public revenues and their stated objectives include to collect the right amount of tax and to make it hard to bend or break the rules. In light of the government’s aim to reduce the gaps between the expected tax take and what is actually collected, it is not surprising that we see this type of targeted action being taken, however this structure has previously enabled some in the sector to recover VAT which is usually a cost to such businesses.