The supply of welfare services has long been exempt from VAT. Welfare services are defined as including the provision of care, treatment or instruction designed to promote the physical and mental welfare for certain categories of vulnerable people.
Originally the legislation limited the exemption to supplies by charities, and so certain providers got round the exemption by using a non-charitable subsidiary to deliver the care.
Why would you do this?
Quite simply to be able to recover the VAT on expenditure. If you were supplying care to a private individual you would want to continue to exempt your supply and not charge VAT and so would supply your services from the charity but if you were contracted by a Local Authority to provide welfare services then you would use the subsidiary, and charge VAT to them as they could recover the VAT and the subsidiary could recover VAT on its costs. The charity and subsidiary would be in a VAT group registration.
HMRC duly changed the law to prevent this and extended the exemption to supplies of care provided by what the law refers to as a “state-regulated private welfare institution or agency”.
There has been a fairly well know avoidance scheme to get round this which, until now, seems to have been accepted by HMRC which continued to involve the use of a VAT grouped subsidiary and the only difference was that the subsidiary would not be Care quality Commission (CQC) regulated.
In effect the regulated entity would tender for the work, but its delivery (the supply for VAT purposes) would not be by a regulated entity.
HMRC have now announced in Revenue & Customs Brief 2/2025 dated 24 April that they will challenge these schemes by using their powers to reject applications for new Group registrations and will seek to remove the relevant subsidiaries from existing group registrations.
Let’s talk
Anyone interested in discussing this further should contact the VAT team or their usual HaysMac contact.
