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The UK’s HM Revenue & Customs (HMRC) has identified a growing trend among state-regulated care providers attempting to exploit VAT legislation through complex VAT grouping arrangements. These schemes aim to reclassify supplies of welfare services from VAT-exempt to VAT-taxable, enabling the recovery of VAT on costs that would otherwise be irrecoverable.
How the Scheme Works
State-regulated care providers or charities, which typically supply welfare services exempt from VAT, are teaming with unregulated care providers via VAT grouping. Contracts originally held between regulated providers and local authorities (LAs) or NHS Integrated Care Boards (ICBs) are transferred to an unregulated provider. As part of the VAT group, this unregulated entity invoices the LAs or NHS ICBs at the standard VAT rate (currently 20%) while sub-contracting service delivery back to the regulated provider.
Since supplies within the VAT group are ignored for VAT purposes, the group recovers VAT on its costs. This outcome is not permitted if the regulated care provider operates independently. Meanwhile, the VAT charged to LAs and ICBs is fully recoverable under VAT Act provisions, creating a tax advantage.
HMRC’s Position
HMRC categorizes these VAT grouping arrangements as tax avoidance, violating the spirit of VAT exemption rules, which apply only when services are supplied by:
- Charities, or
- State-regulated care providers registered with the Care Quality Commission (CQC) or equivalent bodies in Northern Ireland, Scotland, and Wales.
HMRC is actively:
- Rejecting new VAT group registration applications designed to facilitate these schemes.
- Conducting reviews of existing VAT groups suspected of using these avoidance tactics.
- Exercising powers under Section 43C(1) of the VAT Act 1994 to remove parties from VAT groups where necessary.
Guidance for Care Providers
HMRC advises all charities and state-regulated care providers to avoid entering such arrangements. HMRC urges prompt self-reporting if your organization has been involved or suspects incorrect VAT claims.
Reporting and Compliance
- Email HMRC at CAGetHelpOutOfTaxAvoidance@hmrc.gov.uk with “VAT grouping” in the subject line for assistance or disclosure.
- Report suspected tax fraud or avoidance anonymously via HMRC’s online form or phone service.
This enforcement signals HMRC’s commitment to protecting the tax base and ensuring fair application of VAT rules across the care sector
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