HMRC has published Tax Avoidance Spotlight 70, which focuses on VAT arrangements used by state-regulated care providers and charities to reclaim VAT in ways HMRC considers non-compliant.

Normally, welfare services provided by charities or state-regulated care providers are VAT-exempt. This means they don’t have to charge VAT, but also can’t reclaim any VAT on related costs.

How the avoidance scheme works

The arrangement flagged in Spotlight 70 typically works like this:

1. An unregulated company is formed and grouped with the regulated care provider (or charity) in a VAT group.
2. Contracts with the NHS or local authority are moved from the regulated body to the unregulated company.
3. The unregulated company subcontracts the care work back to the regulated care provider.
4. Because they are in the same VAT group, the subcontracted services are ignored for VAT purposes.
5. The unregulated company is now the one providing the care services, which makes them taxable, not exempt.
6. This allows the VAT group to reclaim input VAT, which would not have been possible under the normal setup.

HMRC’s response

HMRC considers this type of structure to be tax avoidance. They have said, where necessary, they will:

• Reject new VAT group registrations that are clearly set up to enable this arrangement.
• Review existing VAT groups where they suspect this structure is being used.
• Request additional information and assess each case individually.

Need support?

If you think Spotlight 70 may apply to your organisation, please get in touch. We can help you understand your position and what steps to take next.