HMRC has recently raised concerns over the increasing use of VAT grouping structures by care providers. These arrangements were originally designed to help care businesses reclaim VAT on certain costs, improving cash flow. However, HMRC now considers some of these structures to be tax avoidance schemes and has begun actively challenging their use across the sector.
Our VAT specialist, Carla Horsfall, provides a summary of the structures under scrutiny and the potential implications for care providers.
What Are VAT Grouping Structures?
Typically, care services provided by state-regulated businesses (e.g. those registered with the CQC or equivalent bodies) are VAT-exempt. This means that VAT incurred on costs related to these services cannot be reclaimed.
To work around this, some organisations have implemented VAT grouping arrangements where a non-regulated company within the group issues invoices with VAT at 20% to the local authorities or NHS Integrated Care Boards (“ICB”). This allows the group to increase VAT recovery, often based on a proportion of non-regulated fee income.
In its recent publication, HMRC has made clear that it will:
- Refuse new VAT group registrations where it believes the structure is designed to secure a tax advantage.
- Review existing VAT groups to assess whether they were established with the primary purpose of gaining a tax benefit.
Sector Response and Emerging Issues
Since HMRC’s briefing note was released, many care providers have reported difficulties receiving payments from local authorities and ICB. In some cases:
- Commissioners are refusing to pay invoices issued by non-regulated entities.
- The VAT element of invoices is being withheld, especially where the provider is part of a structure HMRC may be targeting.
These issues are creating cashflow challenges for care providers, which in turn can affect patient care and the day-to-day running of services.
While HMRC has issued Q&A guidance to help address some immediate concerns, this does not prevent HMRC from reviewing a provider’s VAT grouping arrangements.
Action Required
If your care business uses a VAT grouping structure, it’s essential to act now. We recommend:
- Reviewing your current VAT arrangements, especially any group planning structures.
- Engaging proactively with local authorities, NHS bodies, and HMRC to clarify your position.
- Seeking professional advice to mitigate risks such as:
– VAT clawback
– Legal costs
– Potential penalties
Gaining clarity on your VAT position will not only provide peace of mind but also help reassure stakeholders who may have concerns about your organisation’s VAT treatment.
How We Can Help
Our specialist VAT team is here to support you. We can:
- Review your current VAT grouping arrangements.
- Provide tailored advice based on the latest HMRC guidance.
- Help you navigate conversations with commissioners and HMRC.
If you’d like to discuss your situation or arrange a VAT review, please get in touch.
