HMRC tax avoidance warning – VAT grouping in the care sector
What has happened?
HMRC have published a briefing announcing that they consider the VAT grouping arrangements used by some care providers to be a form of tax avoidance and are intending to investigate providers using such VAT groups.
How does the VAT grouping work?
The arrangements work by creating a VAT group structure that includes a care provider that is non-state regulated (e.g. not registered with the Care Quality Commission or equivalent body) and a provider that is state-regulated.
The non-state regulated provider contracts with a local authority / NHS body to provide care services and charges VAT on their supplies, but the actual care is provided by a state-regulated entity (which will be in the same VAT group as the non-state regulated entity).
If the local authority / NHS body contracted directly with the state-regulated entity, then the supply of care services would be VAT exempt. So, the structuring leads to a taxable supply between the local authority / NHS body and the non-state regulated entity. This taxable supply meant that the provider could increase their own VAT recovery in relation to the care services they provided.
What will HMRC do?
HMRC have said they will refuse new VAT group registration applications that are designed to implement the VAT grouping arrangements set out above.
For pre-existing VAT groups, HMRC have said they will begin investigations immediately and may use their powers to remove certain parties from the VAT group.
Next steps
Local authorities and NHS bodies should carefully review their arrangements with care providers to determine if they contract with care providers that use these VAT grouping arrangements. If they are engaging with such providers, then they should seek legal advice as to whether they need to alter their contractual arrangements or amend any relevant VAT refund claims they have made.
Care providers using these VAT grouping arrangements should seek legal advice concerning HMRC’s briefing and take any necessary remedial steps.
If you have any queries, please contact Katie Harman. We have tax and healthcare specialists that would be happy to assist you.
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