HMRC clarifies its response to the VAT avoidance scheme for residential care homes

After identifying the care home scheme, HMRC has issued an additional explanatory Q&A document, classifying the use of VAT groups as a form of tax avoidance. Care home providers who adopted the scheme and Local Authority or NHS customers who received invoices with VAT, had both asked HMRC numerous questions following issue of Revenue & Customs Brief 02/2025 on 24 April.

Some Local Authorities and NHS bodies had refused to pay the VAT element of these invoices, causing cashflow problems for the providers. Care providers are obliged to charge VAT if they are still making supplies from an entity not regulated by the CQC. Where the Local Authority/NHS has a valid contract with an unregulated entity for a period covered by the invoice, and the unregulated entity is VAT registered and has provided a VAT invoice, the customer should pay the VAT due, and subject to the normal rules, recover the VAT as input tax. This will still be the case even if the VAT grouping has been disbanded by HMRC.

The HMRC document encourages Local Authority/NHS recipients of care services including VAT to speak with their providers and novate the contracts back to a regulated provider, which will revert the supply of services to within the VAT healthcare exemption. HMRC also encourage customers to report cases to them by email where the avoidance scheme is in use, by naming the providers.

You can view the Q&A document by clicking here.

If you wish to discuss any of the above in further detail, speak with our Indirect Tax Services team.