HMRC have published Tax Avoidance Spotlight 70 ‘VAT grouping structure arrangements used by care providers’, highlighting tax avoidance arrangements used by state-regulated care providers to reclaim VAT.

The VAT legislation exempts supplies of welfare services where they are made by either a charity or a state-regulated care provider. The impact for the charity or state-regulated care provider is that they are unable to recover any VAT which relates to these supplies.

The arrangement identified in Spotlight 70 is intended to work as follows:

  • An unregulated entity forms a VAT group with the state-regulated care provider, or charity.
  • Existing contracts for welfare services between the regulated body and the local authority or NHS are transferred to the unregulated provider. New contracts are drawn up with the unregulated care provider.
  • The unregulated care provider then sub-contracts the physical provision of welfare services back to the regulated care provider. A facilitation measure in the VAT grouping legislation means that where services are supplied between members of the same VAT group, they are disregarded for VAT purposes.
  • As the supplies of welfare services are being made by an unregulated care provider, they are taxable at the standard rate of VAT.
  • The VAT group can reclaim input tax in respect of those taxable supplies. Were it not for this arrangement, the reclaim would be blocked.

HMRC consider these specific VAT grouping arrangements to be a form of tax avoidance. They say that, where necessary, they will refuse VAT group registration applications that are designed to implement, or facilitate, these avoidance structures. They are also reviewing existing group arrangements where it is known or suspected that this avoidance arrangement is in operation. During this review, HMRC may request additional information and will assess each case individually.

If Spotlight 70 affects you, please talk to us – we are here to help.