VAT grouping in the care sector – should you be taking action?

What has happened?

For several years, some care providers have secured VAT savings by restructuring the provision of care utilising a non-state regulated business. In April 2025, HMRC issued a policy paper confirming that it considers use of such structures to constitute VAT avoidance, adding the arrangements to HMRC’s list of tax avoidance schemes.
 

The initial response

The policy statement, whilst a shock for some, does bring clarity on HMRC’s view on these arrangements. HMRC has been aware of their use in the care sector, and has accepted VAT grouping registrations, input tax reclaims and inspected taxpayers, without raising concerns. However, a definitive view on the VAT position was not available, leaving uncertainty, until now.

We have seen a mixed response, with providers falling into five categories.

  1. Under Investigation – HMRC has already begun investigating providers. The approach seems sporadic and not limited to geographic area, type of care provided or level of turnover.
  2. Reviewing – as directed by HMRC, some providers have taken independent professional advice to review the arrangements, complete impact assessments, and consider next steps.
  3. Notifying – others have proactively notified HMRC that they operate the structure and are completing the independent review detailed above.
  4. Unwinding – some are taking immediate action to unwind the arrangements.
  5. Waiting – others are doing nothing and awaiting contact from HMRC.

Local authorities, ICBs and NHS bodies are also adopting a variety of approaches, regardless of them receiving separate communications from HMRC. This includes not paying VAT on invoices or disengaging with providers utilising the arrangements.
 

What powers do HMRC have?

HMRC’s powers are wide ranging and are embedded in legislation and/or case law. These include:

  • The power to deny VAT grouping for new arrangements
  • The right to request and inspect documentation
  • Issuing de-grouping notices, and
  • utilising powers to unwind arrangements under the “Halifax” principle
 

What should providers be doing?

Organisations that have not yet taken action may still be asking whether they should they be taking action now? Our view is absolutely, yes!

Providers should be reviewing their arrangements and proactively engaging with HMRC on this matter (if required). Not only does this approach prevent a costly and time-consuming HMRC investigation but by taking an informed position, you can control the dialogue with HMRC, commissioners and other stakeholders. Doing nothing, and awaiting HMRC challenge, is a risky approach, which could prove more expensive in the long run as penalties and interest will add to the final bill.
 

A question of time

Initial indications from HMRC are that it will not seek tax retrospectively. However, what is not clear is whether HMRC will only take a prospective approach using their de-grouping powers and restrict changes to the date a termination notice is issued. Or whether, for those that are not proactively engaging with HMRC, will HMRC adopt a Halifax based argument and seek to assess for VAT from the date the policy paper was issued (24 April 2025).