HMRC to investigate VAT grouping used by welfare providers
What is the issue?
UK VAT law exempts the supply of welfare services provided by public bodies, charities and certain regulated bodies. Unlike public bodies, charities and regulated bodies such as ‘residential care’ cannot claim VAT incurred on expenditure when making such supplies.
To level the playing field, charities and regulated bodies implemented a VAT welfare planning structure to recover VAT that would otherwise be irrecoverable under the partial exemption provisions. The structure is effective for welfare services supplied to local authorities, the NHS and where the VAT grouping provisions are used. This structure has been in place for several years and it was usual for a care provider looking to use it to notify HMRC and the CQC pre implementation.
In Revenue & Customs Brief 2(2025), HMRC have confirmed it now views the use of the VAT grouping provisions within the structure to be a form of tax avoidance. HMRC have promised to fully investigate the tax affairs of those who have implemented it. They also confirmed they will categorise such persons as high-risk taxpayers.
Who is impacted by VAT grouping changes?
Charities and regulated bodies that use a non-regulated entity to supply taxable welfare services to public bodies that would otherwise be VAT exempt if supplied directly by the charity or regulated body.
Actions for organisations using VAT grouping
If your organisation has implemented this structure, you must notify HMRC. Given the potential VAT exposure and wider implications, we strongly recommend doing so through a professional adviser.
We would be happy to advise and assist further if requested.