In Revenue & Customs Brief 2/25 (published 24th April 2025), HMRC delivered a clear and impactful message to the care industry: certain VAT grouping arrangements will no longer be tolerated. Specifically, it laid out how it will be scrutinising state regulated care providers that group with unregulated welfare providers to recover input VAT on costs associated with welfare services, costs that would typically be VAT-exempt.
HMRC’s concerns
HMRC identified a pattern where residential care providers, registered with the CQC or similar, formed VAT groups with non regulated entities. The unregulated party would bill local authorities or NHS Integrated Care Boards, charging VAT, which the regulated provider could then reclaim through the VAT group, effectively extracting input VAT relief on what would otherwise be VAT-exempt supplies.
Although this structure has been used for several years, and in some cases even approved by HMRC itself, it is now viewed as artificial and avoidance oriented. Services supplied to private individuals in identical circumstances would remain exempt, highlighting the discrepancy.
Immediate action taken
The Brief outlines two decisive actions HMRC is taking with immediate effect:
1. Refusal of new VAT group applications
HMRC will actively reject any applications for group registration it believes are designed to facilitate these avoidance-type structures.
2. Review of existing VAT groups
Existing arrangements will face scrutiny. HMRC may:
- Request additional documentation
- Use powers under Section 43C of the VAT Act 1994 to remove parties from VAT groups
- Issue termination notices, but only after completing investigations.
If HMRC determines that a scheme is avoidance-based, it will not only unwind the VAT benefit but also treat the organisation as a high-risk taxpayer, which could trigger broader investigation.
Why this matters
For many care providers, VAT grouping structures are more than just tax tools. They help streamline operations, reduce administrative costs and support diverse service models. However, by linking these structures to VAT recovery in ways HMRC deems outside legislative intent, providers may now unknowingly find themselves in breach of HMRC expectations.
While some groups may have acted in good faith, relying on historic HMRC tolerance, this new stance shifts the landscape. Importantly, this is a policy and compliance pivot, not a legislative change, opening possible legal and reputational debate.
Here’s what you need to do
Providers or advisers should take proactive action:
- Conduct a VAT health check: Review existing group structures, inter-company supply chains, invoicing methods and contractual designs.
- Assess risk exposure: If your group includes unregulated entities delivering NHS or local authority-funded services, consider whether the arrangement could be viewed as avoidance-focused.
- Engage HMRC early: If you're confident in your structural integrity, pre emptive communication may be beneficial. HMRC is open to information. Email CAGetHelpOutOfTaxAvoidance@hmrc.gov.uk with ‘VAT grouping’ in the subject.
- Seek specialist advice: VAT grouping rules are complex, particularly when layered with regulatory frameworks and long-standing practices. Professional guidance will help clarify exposure and explore redesign options.
Next steps
HMRC emphasises that its actions are prospective and designed to address current and future risk, not retroactive dismantling of past groupings. However, given the long history of some of these structures, how this policy plays out in practice remains uncertain.
HMRC’s new stance on VAT grouping within the care sector marks a significant regulatory shift. From tolerated practice to targeted enforcement. Organisations must now pause, assess and act. By engaging with HMRC, reassessing VAT health and seeking guidance where needed, care providers can navigate this changing VAT landscape with greater confidence and resilience.
If you'd like support reviewing your VAT grouping arrangements or preparing HMRC responses, please contact Lisa Burnside, VAT Director at UHY, who can provide expert advice on these changes. Alternatively, speak with your usual UHY VAT adviser.
