VAT avoidance in care provision

HMRC recently published Revenue and Customs Brief 2 (2025) and Spotlight 70 setting out its view that a long running structure used to provide care services to local authorities and NHS bodies constitutes avoidance that it will take steps to combat.

Care services are exempt from VAT when provided by a state regulated (usually Care Quality Commission regulated) body, public body or charity. This enables care services to be provided to individuals at a lower price than if VAT was charged. However local authorities and NHS bodies are usually entitled to recover VAT incurred in respect of their statutory obligations. If VAT could be charged on care services to those customers, then the net costs should be lower because the care provider can recover the VAT charged, rather than needing to reflect that blocked VAT in the final price.

In order to take advantage of the VAT differential for some customers, some care providers set up two providing entities – one regulated, one unregulated. The regulated entity would provide services to individuals, the unregulated to local authorities and NHS bodies. The two entities would be VAT grouped so that more VAT on shared costs could be recovered.

The exact details vary between different arrangements. In some, the unregulated entity may purely be a ‘wrapper’ with no resources of its own, the services really provided by the regulated body but diverted through the unregulated one to remove the VAT exemption. Alternatively, it is possible for both unregulated and regulated entity to have its own resources and effectively operate independently once the decision is made for one or the other to bid for a contract, with a spectrum of options in between.

HMRC has said it is intending to use its protection of the revenue powers to remove VAT group treatment where this structure is in place, but possibly more impactful is its view that this represents avoidance. As part of the public sector, local authorities and NHS bodies will need to carefully consider their appetite to continue with contracts entered into on this basis.

Whilst we do not expect this structure to be widespread within registered providers, it is worth being aware of if you do provide care. If this is a structure you are involved in, we would strongly recommend taking independent advice on how this announcement will impact you.