Key Implications
HMRC has changed its position on VAT grouping structures commonly used by care providers to recover otherwise irrecoverable VAT, these are now considered tax avoidance. Care providers now face refusal of VAT group registrations or removal from existing groups. NHS bodies buying in these services should urgently review their arrangements and seek advice.
HMRC’s Change in Stance on VAT Grouping in the Care Sector
On 24 April 2025, HMRC published Revenue & Customs Brief (RCB) 02/25, signalling a significant and unexpected change in its approach to VAT grouping structures used by state-regulated care providers. HMRC now explicitly views these structures, which involve incorporating an unregulated entity into the supply chain to recover VAT on costs, as a form of tax avoidance. This contradicts previous HMRC acceptance of these arrangements and is causing considerable concern and disruption within the care sector and for local authorities. Within the NHS those primarily affected will be ICBs and Mental Health Trusts, hereafter referred to as “the NHS”.
HMRC will use existing powers to refuse new VAT group applications and remove entities from existing groups involved in these structures. While these actions are stated to be prospective, the long-standing nature of these arrangements and previous HMRC reviews raise questions about potential challenges and the implications for historical VAT savings.
What is HMRC Targeting and Why?
- HMRC’s new Revenue & Customs Brief (RCB) 02/25 states that certain VAT grouping arrangements used by state-regulated care providers are now considered tax avoidance. Specifically, HMRC is focused on structures where:
- A regulated care provider and an unregulated company are part of the same VAT group.
- The unregulated entity invoices local authorities or the NHS, allowing the regulated entity to recover VAT on its otherwise exempt services.
- This has historically enabled VAT recovery on costs tied to local authority/NHS contracts, which is now under scrutiny.
- HMRC argues this planning contradicts the purpose of VAT grouping and is no longer acceptable, even though such arrangements were previously tolerated.
HMRC’s Actions
- HMRC will take immediate action using existing powers.
- It will “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.” (RCB 02/25)
- HMRC is launching a programme to review and investigate existing VAT groups suspected of using these structures.
- Where avoidance is determined, HMRC “will exercise its Protection of the Revenue powers under Section 43C(1) of the Value Added Tax Act 1994 to remove the relevant parties from VAT groups.” (RCB 02/25)
- These actions to refuse new applications and remove entities from existing groups are stated to be prospective.
Impact of Degrouping
- Supplies between the regulated and unregulated companies are no longer disregarded.
- The regulated company will be making VAT-exempt supplies of care/welfare services to the unregulated company. The VAT recovery by the regulated company is no longer determined by looking through to the unregulated company’s supplies, but determined by the supplies it makes itself, which are VAT-exempt. It will lose entitlement to reclaim VAT costs.
- The unregulated company will not be charged VAT by regulated company but must still charge VAT on services to the NHS.
A Sudden Shift in Approach
This marks a significant reversal in HMRC’s long-standing position:
- No legislation has changed, and there was no prior consultation with sector bodies such as JVCC, CTG, CIOT, CIPFA, or the HfMA.
- Many care providers have operated under these structures for years, with examples of approval in writing by HMRC or review during routine VAT inspection.
- Sector advisers are now calling the move “heavy-handed” and note that not all restructuring was purely VAT-driven.
- This lack of warning has left many providers facing sudden uncertainty and legal grey areas, especially for existing contracts.
Sector Position and Potential Legal Challenges
Advisors to care providers have emphasised that their VAT restructuring is not simply a means of enabling VAT recovery and is fully supported by commercial rationale. They argue HMRC’s approach is unnecessarily heavy-handed and seeks to conflate all forms of contract restructuring.
The sector is expected to challenge HMRC’s position both technically and politically. Key arguments might include:
- Legitimate Expectation: That HMRC had previously accepted or tolerated these arrangements, creating a reasonable expectation of their validity.
- Overreach of Powers: HMRC’s use of “protection of the revenue” powers is under legal scrutiny, included in the Barclays case, currently under appeal with an Upper Tribunal hearing expected in March 2026.
- No Legislative Change: The new stance has no basis in amended VAT legislation and relies purely on a change in enforcement approach.
Impact on the NHS
- Local authorities and the NHS are explicitly included as readers of RCB 02/25.
- We expect local authorities and the NHS will be asked by HMRC to confirm which providers have used novated structures.
- The NHS will face no tax liabilities or penalties where structures have already been implemented. The changes are prospective. However, the NHS will continue to receive taxable invoices from the contracted unregulated company and can reclaim the VAT under the normal rules. The provider’s VAT efficiency will be lost without further restructuring, and arrangements could be restructured again to remove the redundancy.
- If the NHS is in the process of tendering for care/welfare services, the process might need to be restarted to take account of HMRC’s changed position.
Conclusion
HMRC’s unexpected and unilateral shift in policy regarding VAT grouping in the care sector has created significant uncertainty and concern. While HMRC intends to apply these changes prospectively by preventing new arrangements and removing entities from existing groups, the long history of these structures and previous HMRC acceptance raises questions about the practical implementation and the potential for challenge.
Care providers using these structures must urgently review their arrangements, seek professional advice, and prepare for potential engagement with HMRC and a likely reduction in VAT recovery benefits. The outcome of possible legal challenges and the Barclays Upper Tribunal appeal in March 2026 will be essential to watch.