HMRC takes action against VAT structures used by the care sector

Under UK VAT law, welfare services provided by a charity or regulated bodies are exempt from VAT meaning they are unable to claim back VAT on their costs. 

In recent years, these providers have formed VAT groups with a connected business that is not regulated, creating one entity for VAT purposes. This restructuring effectively results in the welfare services being subject to VAT and allowing VAT to be reclaimed on associated costs. 

Care providers using this arrangement, including care homes, homecare providers and supported living will be greatly impacted by HMRC’s change in policy. 

While HMRC had previously accepted the principles of welfare restructuring, with immediate effect, it will now use its ‘protection of the revenue’ powers to stop new arrangements. It may also seek to undo any arrangements already in place where it feels this is appropriate. 

This will be hard hitting for a sector that is currently under increasing cost pressures. Having the VAT savings removed could see many care homes and other similar services face significant financial difficulties with risk of closures. 

The care sector will need to act upon HMRC’s change in policy sooner rather than later, to review their arrangements and be ready to deal with any HMRC enquiries.