HMRC to crack down on “tax avoidance” by residential care providers through use of VAT grouping structures

HM Revenue & Customs (HMRC) has issued a warning to residential care providers over a VAT grouping structure that it has labelled a form of tax avoidance.

The department issued a brief on Thursday (24 April) to clarify its position on state-regulated care providers that form a VAT group with a non-state-regulated provider of welfare services.

The VAT group structures in question involve both a provider which is not state-regulated - meaning they are not registered with the Care Quality Commission (CQC) in England or the equivalent bodies in Northern Ireland, Scotland and Wales - and a provider that is state-regulated.

“HMRC has identified a growing use of VAT grouping structures by state-regulated care providers to recover VAT on costs that relate to supplies of welfare services that would otherwise be exempt from VAT", the note said.

It added: "These structures incorporate an unregulated entity into the supply chain between the state-regulated provider and the local authority or NHS ICB to which the supply is made. Identical supplies made to private individuals remain exempt from VAT.

"HMRC consider these VAT grouping structures to be a form of tax avoidance and will take the following actions with immediate effect."

The note warned that HMRC would "make full use of its powers" to protect VAT revenue and, where necessary, refuse new VAT group registration applications that are designed to implement and facilitate these VAT grouping structures.

HMRC also said that it is launching a programme to review and investigate all instances where it is known or suspected that an avoidance scheme is in operation within a VAT group arrangement.

It advised that organisations currently using the VAT grouping structures to review their current VAT accounting practices independently and get professional advice.

It also urged organisations to contact HMRC if they believe their business' arrangements fall within the description given in the brief.

Adam Carey