HMRC changes VAT grouping policy to crack down on tax avoidance in UK care industry

Welfare services have historically been exempt from VAT. Although the exemption originally applied only to charities, HMRC later extended it to include all state-regulated private welfare institution or agencies which are registered with the Care Quality Commission (CQC) in England or the equivalent bodies in Northern Ireland, Scotland and Wales.

However, HMRC said it has identified the “growing use” of VAT grouping structures whereby an unregulated welfare services provider is incorporated with the explicit intention of recovering “VAT on costs that relate to supplies of welfare services that would otherwise be exempt from VAT.”

HMRC said it now considers such structures “to be a form of tax avoidance” and, where necessary, will reject any new VAT group registration applications deemed to be expressly designed to implement and facilitate these types of arrangements.

It has also launched a programme to review and investigate all existing VAT grouping structures and “all instances where it is known or suspected that an avoidance scheme is in operation within a VAT group arrangement.” Taxpayers have already begun receiving notifications of such reviews.

These developments also follow a 2024 decision by the FTT that HMRC must weigh the loss of revenue resulting from the VAT grouping against the effect on any entities seeking to set up a VAT group.

Commenting on HMRC’s latest policy change, Pinsent Masons’ VAT expert, Bryn Reynolds, said: "HMRC’s application of their protection of the revenue powers was significantly constrained by the tribunal last year where it was held that there needed to be a loss to the revenue beyond the normal consequences of VAT grouping. If you think that you are potentially impacted by this change in policy we would be happy to speak with you about the best strategy to resolve any enquiry or dispute with HMRC, including taking action before any enquiry or dispute arises. Taking swift action can often improve the position regarding HMRC."

Care providers will need to re-assess existing business structures to ensure compliance with HMRC’s new position, said Pinsent Masons’ corporate tax expert, Peter Morley. "As well as resolving any dispute with HMRC, care providers may need to rethink their corporate structures and intra-group arrangements in order to mitigate the impact of this change in policy. Any such changes can have implications beyond VAT and we would be happy to discuss how you are affected."