VAT welfare structure planning ended by HMRC
HMRC has released Revenue and Customs Brief 2 (2025): the use of VAT grouping within the care industry which is effectively an attempt to end charging VAT on care services that would otherwise be VAT exempt.
This will likely impact care service providers who have used, or are considering using, an unregulated trading subsidiary to charge VAT on care services that would otherwise be VAT exempt.
Why is this important?
Previously, HMRC has not objected to the ‘VAT welfare structure’ whereby a charity or state regulated care provider would novate the care contracts with local authorities and NHS ICBs to a trading subsidiary in the same VAT group. Under this structure, VAT is chargeable to the local authority since the supply of care by the VAT group is made by a body that is not directly state regulated. This has enabled care providers to recover VAT on costs leading to savings.
However, HMRC have now announced that they will view this structure as a form of VAT avoidance and will look to prevent the structure being used going forward. This announcement does not follow any change in VAT legislation.
Whether the structure counts as avoidance will depend on an organisations individual circumstances. It is also possible that HMRC’s change of policy could be challenged.
What does this mean?
Formerly, organisations who have had the structure in place would have benefitted from increased VAT recovery on costs. Now that HMRC has announced that they will be reviewing anyone who has put the structure in place, they will be at risk of losing the VAT recovery benefits. Furthermore, billing processes may need to be changed.
HMRC have announced that they will immediately begin reviewing anyone they know or suspect to be using this structure. If HMRC determines that VAT avoidance is taking place, they will remove the trading subsidiary from these VAT groups, as the way of removing the VAT recovery benefits.
In addition, HMRC will be looking to reject new VAT group applications made under this structure as relating to VAT avoidance / ‘protection of the revenue’.
What to do next?
If you are currently using or considering this structure, we would recommend the following actions.
- If your organisation was considering setting up the structure, consider whether to continue given that VAT group applications under the structure are likely to be challenged.
- Anyone who has previously notified HMRC of their intention to operate this structure should prepare to be contacted by HMRC.
- Consider notifying HMRC that you currently operate the structure and begin budgeting for a reduction in VAT recovery in future.
- Consider your arrangements and decide if it does constitute VAT avoidance, given there have been no recent changes in VAT legislation in this area. Some entities have used subsidiaries for reasons other than to make VAT savings.
If you are unsure if this will impact you or you would like more information, contact Rob Warne or speak to your usual Crowe contact.