VAT grouping structure arrangements used by care providers (Spotlight 70)
Find out about tax avoidance arrangements used by state-regulated care providers to reclaim VAT.
HMRC are aware of a growing number of state-regulated care providers seeking to gain a tax advantage. This is achieved by using a combination of VAT grouping and the different VAT liabilities that apply, depending on whether welfare services are supplied by a state-regulated or unregulated care provider.
The arrangements seek to change the VAT liability of the supplies made to local authorities (LAs) and NHS Integrated Care Boards (ICBs) from exempt to taxable. This would enable the care provider to recover VAT on costs which would otherwise not be recoverable.
HMRC consider these specific VAT grouping arrangements to be a form of tax avoidance.
VAT legislation states that VAT exemption is applicable for supplies of welfare services where they are made only by either:
- a charity
- a state-regulated care provider registered with the Care Quality Commission (CQC) or the equivalent regulatory bodies in Northern Ireland, Scotland and Wales
The impact for the charity or state regulated care provider is that they are unable to recover any VAT which relates to these supplies.
How the arrangements are claimed to work
State-regulated care providers use these arrangements to recover VAT on costs that relate to supplies of welfare services that they otherwise would not be entitled to claim.
This is achieved by inserting an unregulated care provider into the supply chain between the state-regulated care provider (or charity) and the LA or the NHS ICB.
The arrangements are instigated by the care provider, not the LAs and NHS ICBs, who are the recipient of these services.
How the state-regulated care provider implements the arrangements
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An unregulated entity forms a VAT Group with the state-regulated care provider, or charity.
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Any contracts for the supply of welfare services already in place between the regulated body and the LA or NHS ICB customer are transferred to the unregulated care provider. New contracts are drawn up between the unregulated care provider and the LA or NHS ICB.
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The unregulated care provider then sub-contracts the physical provision of welfare services back to the regulated care provider. The facilitation measure provided by VAT grouping means that where services are supplied between members of the same VAT group, they are disregarded for VAT purposes.
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The unregulated provider makes the supplies of welfare services to the LA or NHS ICB. As it is not regulated, these supplies of welfare services are taxable for VAT purposes at the standard rate, currently 20%.
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As a result of the newly implemented grouping structure, the VAT group is able to recover VAT incurred on the cost of goods and services that would otherwise have been blocked if incurred by the regulated care provider outside a VAT grouping structure.
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The VAT charged to the LA or NHS ICB is fully recoverable under Section 33 or Section 41 of the Value Added Tax Act 1994 respectively as relating to their non-business statutory duties.
State-regulated care providers and charities should be aware when being offered this type of structure and avoid it.
HMRC’s compliance response for businesses
New VAT group applications
HMRC will make full use of its powers to protect the revenue and, where necessary, refuse VAT group registration applications that are designed to implement, or facilitate, these avoidance structures.
Existing VAT groups
HMRC is launching a programme to review all instances where it is known or suspected that this avoidance arrangement is in operation. During this review, HMRC may request additional information and will assess each case individually. Where necessary, HMRC will exercise its Protection of the Revenue powers under Section 43C (1) of the Value Added Tax Act 1994 to remove the relevant parties from VAT groups.
While HMRC will begin its inquiries immediately, any termination notice issued under these powers will only take effect prospectively once the investigation is complete.
What to do if your organisation is involved in this type of scheme
If you think your organisation is involved in this type of arrangement or has made an incorrect claim for VAT, send an email, including the words ‘VAT grouping’ in the subject field to: CAGetHelpOutOfTaxAvoidance@hmrc.gov.uk
Report a scheme
You can report tax fraud and tax avoidance schemes, including the person offering them to you by contacting HMRC using our online form. Read about reporting tax fraud.
You can submit this form anonymously and do not have to give your name, address or your email.
You can phone HMRC to report tax fraud if you cannot use the online form.