VAT Grouping within the Care Industry– HMRC Targets VAT Group Strategies

VAT Grouping in the Care Sector – HMRC Targets VAT Group Strategies

On 24 April 2025, HMRC issued a Policy Brief formally confirming its stance on the use of VAT grouping within the care industry. In this commentary, we provide a deeper technical analysis of the position taken, the legislative backdrop, risks arising, and practical steps for those affected.

Background: The VAT Challenge in the Care Sector

State-regulated care providers (registered with the Care Quality Commission (CQC) in England, or the equivalent bodies in Scotland, Wales, and Northern Ireland) typically supply exempt welfare services under Group 7, Schedule 9, Value Added Tax Act 1994 (“VATA 1994”).

Exempt status creates a well-known VAT tension:

• No VAT is charged on supplies.
• VAT recovery on related costs is restricted (often leading to significant irrecoverable VAT).

Understandably, the sector has historically sought VAT efficiency, and VAT Group restructuring strategies emerged.

What is a VAT Group Restructuring Strategy?

The strategy involves introducing a non-state-regulated entity (i.e., not CQC-registered) into the corporate group. This unregulated entity contracts with the funding body (e.g., local authority or NHS Integrated Care Board) and makes taxable supplies, while the regulated entity delivers the actual care services.

By VAT grouping the two entities together under s.43 VATA 1994:

• Supplies between them are disregarded (no VAT charged between group members).
• The group, as a single taxable person, recovers VAT on costs attributable to taxable supplies.

In effect, VAT that would otherwise have been blocked becomes recoverable.

However, this elegant restructuring largely depends on the existence of an artificial interposition, without any material change in the underlying economic supply, a red flag for HMRC.

HMRC’s Formal Stance

HMRC now openly categorises such arrangements as tax avoidance. The key observations made are:

• The supply to the public sector body (e.g., local authority) remains essentially the same.
• The insertion of an unregulated entity serves no real commercial purpose other than to engineer VAT recovery.
• Identical supplies made directly to private individuals continue to be treated as exempt, reinforcing the artificial nature of the arrangement.

HMRC regards this as incompatible with the intended operation of VAT exemption rules.

Legal Framework: Protection of Revenue Powers

HMRC cites its ability to act under:

• Section 43C(1) VATA 1994: allowing HMRC to remove entities from VAT groups where necessary to protect the Revenue.

This power is wide-ranging and discretionary. While historically used sparingly, HMRC’s clear statement signals an intention to deploy it far more assertively within this sector.

Moreover, under the Disclosure of Tax Avoidance Schemes VAT and Other Indirect Taxes (DASVOIT) rules, advisors and businesses could also face separate reporting obligations where arrangements are considered abusive.

Risks for Care Providers

The risks of maintaining a VAT Group Restructuring Strategy now include:

• Compulsory ejection from VAT groups by HMRC.
• Assessment of input VAT incorrectly recovered, potentially plus interest and penalties.
• “High-risk” taxpayer status, leading to enhanced scrutiny across all taxes for the business and connected persons.
• Reputational damage particularly significant in the care sector where relationships with public sector bodies must be trusted and transparent.
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What Should Businesses Do Now?

Providers operating or considering such structures must:

• Undertake an immediate review of current VAT group arrangements, ideally with independent professional VAT adviser.
• Assess the commercial rationale underpinning the structure.
• Seek independent professional VAT advice where there is any doubt about the defensibility of the arrangement.
• Consider voluntary disclosure if at risk.
• Prepare for challenge, gathering evidence of the commercial substance behind arrangements.

Where there is little or no defensible commercial purpose beyond VAT recovery, a proactive restructure may now be prudent

Looking Ahead: A Strategic Approach

At Deeks VAT Consultancy, we strongly advocate for strategic VAT planning that can survive HMRC scrutiny.

The key is aligning VAT outcomes with genuine commercial activity, not mere paper exercises.

Forward-thinking providers should consider:

• Partial Exemption Special Methods (PESMs) to improve VAT recovery legitimately.
• Shared services models with carefully designed contracts reflecting economic reality.
• Alternative group structures ensuring that VAT grouping is only used where natural business integration supports it.

Remember: Effective VAT planning is not about skating as close to the line as possible. It’s about building a model that stands strong when HMRC decides to blow the whistle.

If you believe your business may be affected, or you would like an independent review of your VAT arrangements, Deeks VAT Consultancy is here to help.

📩 Contact us today for expert advice that protects your business and futureproofs your VAT position.

Jane Deeks

jane@deeksvat.co.uk

07710553831

Managing Director