HMRC Targeting VAT Grouping in the Care Industry | Crackdown on Tax Avoidance
HMRC focuses its attention on a variety of service and industry sectors when seeking to undertake VAT investigations.
For a considerable period, many operatives within the care industry have benefited from an artificially reduced VAT liability by adopting the practice of ‘VAT grouping.’ This involved ‘state-regulated’ providers, i.e. those registered with the Care Quality Commission, and ‘non-state regulated’ care providers forming VAT groups, enabling them to recover VAT on otherwise exempt supplies.
HMRC now categorises such arrangements as tax avoidance. On the 24th April 2025, it published Revenue and Customs Brief 2 (2025), outlining its position on the use of VAT grouping in the care industry. HMRC maintains that the insertion of an unregulated entity into the trading group serves no real commercial purpose other than to facilitate VAT recovery.
Tim Thompson of KANGS comments upon this new approach by HMRC.
How VAT Grouping Within the Care Industry Operated
By virtue of section 43 of the Value Added Tax Act 1994, (‘the Act’) two or more corporate entities under common control can register as a ‘single taxable person’ for VAT purposes. Within a VAT group, supplies made between group members are disregarded for VAT accounting, allowing the group to centralise VAT reporting and potentially recover VAT on costs that would otherwise be non-recoverable due to exemption rules.
In the care industry, HMRC’s view is that this mechanism has been increasingly manipulated, where a ‘non-state-regulated provider’ is included in the supply chain for the sole purpose of avoiding payment of the full amount of VAT due.
Exercise by HMRC of its Statutory Powers
Section 43C (1) of the Act enables HMRC to remove entities from VAT groups where it believes it necessary to protect the Revenue.
This power is wide ranging and HMRC has made it quite clear that it will be deployed extensively and assertively in the future.
Amongst other activity, HMRC:
- will refuse new VAT group registration applications seen to be crafted solely for the purpose of obtaining a tax advantage,
- is launching a targeted review and investigation programme into current VAT groups where it is known or suspected that an avoidance scheme is in operation,
- may request detailed information on how VAT is accounted for within the group,
- investigate the flow of supplies and costs within the group between regulated and unregulated entities,
- remove entities from VAT groups where they are found to be facilitating tax avoidance.
How Can We Help?
HMRC has stated that any termination of group memberships will not take effect until the investigation is complete, but it advises businesses not to wait and to adopt pro-active measures in order to mitigate their position.
Affected care providers should review their VAT arrangements immediately and seek immediate experienced legal advice. Our team offers many years’ experience handling tax disputes of every nature involving HMRC on behalf of our clients.
If your organisation is the subject of a VAT investigation by HMRC, please do not hesitate to contact the team at KANGS who will be delighted to hear from you.
Tel: 0333 370 4333
Email: info@kangssolicitors.co.uk
We provide initial no obligation discussion at our three offices in London, Birmingham, and Manchester. Alternatively, discussions can be held through video conferencing or telephone.
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