HMRC Business Brief 2(2025): What Care Providers Need to Know

Recent changes in HMRC’s VAT policy could significantly increase costs for state-regulated care providers. Business Brief 2 (2025) specifically targets VAT grouping arrangements that were previously used to recover VAT on otherwise exempt services. The new rules mean that many care providers will lose the ability to reclaim VAT, resulting in a direct cost increase for affected organisations.

1.What’s Changing?

Previously, some care providers utilised VAT grouping arrangements to recover VAT on costs that would otherwise be exempt. These structures often combined state-regulated care providers with non-state-regulated welfare service providers, allowing for VAT efficiencies.

However, HMRC now sees these arrangements as a form of tax avoidance and has decided to reject any new VAT grouping applications that leverage this structure. Furthermore, HMRC will actively review and dismantle existing VAT groups that were formed with the same objective.

2.Challenging the VAT Avoidance Narrative

While HMRC has the authority to challenge tax avoidance, it’s arguable whether VAT-efficient welfare arrangements are truly avoidance, or whether they uphold one of the core VAT principles established when VAT was first introduced.

VAT was not intended to burden local taxation—a principle reinforced by Section 33, which ensures that VAT does not become a cost to local government. However, as care provision has shifted toward the private sector, VAT-exempt services delivered by non-public providers cannot reclaim VAT on costs incurred. This results in higher charges for local authorities who fund these services, indirectly placing a VAT burden on local taxation.

3.The Role of VAT Groups

The VAT grouping structures under scrutiny simply restore the VAT position to what it would be if services were provided directly by a local authority—removing that burden on local funding.

4.How Will This Impact the Care Industry?

For businesses that relied on VAT grouping to improve cost efficiency, this change could result in:

• Higher VAT costs for state-regulated care providers.
• Increased scrutiny for existing VAT groups.
• Potential adjustments or removal from VAT groups, negating VAT benefits.

HMRC’s enforcement of these new policies means affected businesses must reassess their VAT strategies and prepare for potential financial implications

5.Why Are Costs Increasing?

Care providers that form VAT groups with non-state-regulated welfare service providers have, until now, been able to recover VAT on various expenses. However, HMRC now considers this a form of tax avoidance, rejecting new VAT grouping applications and actively dismantling existing structures that rely on this mechanism.

The consequence? Care providers will have to absorb VAT costs that were previously recoverable, making service provision more expensive and potentially impacting financial sustainability.

6.VAT as a Non-Issue for NHS Trusts and Local Authorities

Interestingly, if NHS Trusts or local authorities provide care services directly, VAT isn’t a cost in the same way. These public-sector bodies operate within a framework where VAT exemptions and special refund mechanisms prevent the tax burden from becoming an issue.

By contrast, private or independent state-regulated care providers that rely on VAT grouping structures now face a significant financial disadvantage compared to those delivering services within the public sector.

7.Key Considerations for Care Providers

• Budget pressures: With VAT becoming an irrecoverable expense, care providers may need to adjust financial models to accommodate rising costs.
• Competitive disadvantage: Organisations outside the public sector will struggle with VAT inefficiencies that NHS Trusts and local authorities do not face.
• Long-term sustainability: Care providers may need to explore alternative VAT structures, renegotiate contracts, or reconsider service delivery models.

8. HOW CARE PROVIDERS SHOULD PREPARE

• New Arrangements – If you are thinking about setting up a similar structure, consider whether this should now continue if VAT group applications under the structure are likely to be challenged.
• HMRC Notification – Consider notifying HMRC that you currently operate a similar arrangement and begin budgeting for any reduction in VAT recovery going forward. Similarly, if you have previously notified HMRC that you operate this arrangement, you should prepare to be contacted by HMRC.
• Consider if your arrangements constitute VAT avoidance. Do you operate a subsidiary for other reasons and the VAT savings are a consequence of your structure?

This shift in policy underscores the growing complexities of VAT in the care industry and the need for providers to reassess their tax strategies. If your organisation is affected, seeking specialist VAT advice may be essential to navigating these changes.

If you have any queries about what this brief means for you, please do not hesitate to get in contact with Alistair Duncan or your usual AAB contact.