In April, HMRC issued a Policy Brief addressing the use of VAT grouping arrangements within the care sector—specifically targeting structures involving both regulated and unregulated care providers. These arrangements have historically been used to improve VAT recovery, but HMRC is now taking steps to close what it views as a tax avoidance loophole.
HMRC Policy Brief
The Brief targets a VAT planning arrangement designed to improve VAT recovery by way of a VAT group comprising a regulated and an unregulated care provider. Many organisations have taken advantage of the arrangement over the years, but action is now being taken by HMRC to close the loophole.
The planning arrangement
The tax advantage is achieved by using the VAT grouping rules and turning what would otherwise be exempt income into taxable income. Improved VAT recovery on costs is achieved as a result.
Under the planning arrangement an unregulated provider is inserted into the supply chain between the regulated provider and the Local Authority (“LA”) or the NHS Integrated Care Board (“NHS ICB”),
The regulated and unregulated provider then form a VAT group and any contracts for the supply of welfare services already in place between the regulated provider and the LA or NHS ICB customer are transferred to the unregulated provider.
The unregulated provider then sub-contracts the physical provision of welfare services back to the regulated provider. These services are disregarded for VAT purposes under the umbrella of the VAT group.
Under the terms of the agreement with the LA or NHS ICB, the unregulated provider supplies welfare services to the LA or NHS ICB.
Such supplies fall to be taxable at the standard rate (currently 20%) as the scope of the exemption for the supply of welfare services is confined to regulated providers.
The LA or NHS ICB is indifferent to the charging of VAT as it is entitled to recover VAT properly charged on services related to its non-business activities.
For the care provider, though, an improved VAT recovery position is achieved because of the VAT grouping structure.
VAT on costs is recoverable as the supplies made by the VAT group are taxable.
HMRC crackdown
HMRC has made it clear that it considers these VAT grouping structures to be a form of avoidance.
HMRC now scrutinises new VAT group applications more carefully and it appears inevitable that any such applications intended to make use of the planning arrangement will be refused.
HMRC has also started an exercise to investigate instances where it is known or suspected that the avoidance arrangement is in operation.
Questions will be asked and, where deemed necessary, VAT groups will be disbanded, or relevant parties removed from existing VAT groups. Any changes will be made prospectively and will not have retrospective effect.
HMRC is also encouraging organisations that have implemented this type of arrangement to send an email (with ‘VAT grouping’ in the subject field) to CAGetHelpOutOfTaxAvoidance@hmrc.gov.uk. Suffice to say that this is likely to result in action by HMRC to terminate the arrangement.
At this stage, HMRC is not saying too much about what might happen to those continuing to make use of the arrangement, without there being any contact with HMRC.
More generally, the Policy Brief includes a warning that HMRC will fully investigate a person’s tax affairs if use is made of a tax avoidance scheme.
Taxpayers may be identified as “high risk” and subjected to close inspection over all their tax affairs (not just those parts involving the use of avoidance schemes).
Looking ahead
HMRC’s latest stance signals a clear shift in how VAT grouping arrangements in the care sector will be treated going forward.
Charities and care providers currently using or considering such structures should review their arrangements carefully and be prepared for increased scrutiny.
If your organisation may be affected or you would like tailored advice on VAT compliance and planning, please don’t hesitate to contact the team at PEM.
We’re here to help you navigate these changes with confidence.
Learn more and get advice
Get in touch with our Charities team if you’re looking to learn more about how this could affect your charity or non-profit organisation.
Please note that this content is not intended to give specific technical advice. It is designed to highlight some of the key issues rather than provide an exhaustive explanation of the topics. Professional advice should always be sought before action is either taken or refrained from as a result of information contained herein.
