21. May 2026

HMRC Spotlight 70: VAT Grouping Arrangements Used by Care Providers Explained

The UK government has recently highlighted concerns regarding certain VAT grouping arrangements being used within the care sector. Through HM Revenue and Customs Spotlight 70, HMRC has warned care providers about structures that may be considered a form of tax avoidance.

This update is particularly important for:

• State-regulated care providers
• Charities providing welfare services
• NHS Integrated Care Boards (ICBs)
• Local Authorities (LAs)
• Healthcare and social care organisations

Understanding these VAT rules is essential to ensure compliance and avoid future investigations or penalties.

What Is HMRC Spotlight 70?

HMRC issued Spotlight 70 to address VAT grouping arrangements designed to gain a tax advantage by changing the VAT treatment of welfare services supplied by care providers.

According to HMRC, some organisations are attempting to:

• Convert exempt welfare services into taxable supplies
• Recover VAT on operational costs that would normally be non-recoverable
• Use VAT grouping structures involving unregulated entities

HMRC has clearly stated that these arrangements may be viewed as tax avoidance schemes.

How VAT Exemption Works for Welfare Services?

Under UK VAT legislation, welfare services are generally exempt from VAT when supplied by:

• A registered charity
• A state-regulated care provider registered with:
  • Care Quality Commission (CQC)
  • Care Inspectorate Wales
  • Care Inspectorate Scotland
  • Equivalent Northern Ireland regulatory bodies

Because these supplies are VAT exempt, providers are usually unable to reclaim VAT on related expenses and operational costs.

How These VAT Grouping Arrangements Operate?

HMRC has identified structures where an unregulated entity is inserted between the regulated care provider and the customer.

Typical Arrangement Structure:

1. Formation of a VAT Group:

An unregulated company forms a VAT group with the regulated care provider or charity.

2. Contracts Are Transferred:

Existing welfare service contracts with:

• Local Authorities (LAs)
• NHS Integrated Care Boards (ICBs)

are transferred from the regulated provider to the unregulated entity.

3. Services Are Subcontracted Back:

The unregulated provider then subcontracts the actual care services back to the regulated provider.

4. VAT Treatment Changes:

Because the unregulated provider is making the supply:

• Services become standard-rated for VAT (currently 20%)
• The VAT group may recover VAT on associated costs

HMRC believes this structure is specifically designed to obtain a VAT recovery advantage.

Why HMRC Is Concerned?

HMRC considers these arrangements problematic because:

• They artificially alter VAT liability
• They attempt to bypass VAT exemption restrictions
• They are structured primarily to gain VAT recovery benefits
• They create arrangements that HMRC may view as non-compliant

The government has therefore warned providers to avoid entering such arrangements.

HMRC Compliance Actions?

New VAT Group Applications:

HMRC has confirmed it may:

• Refuse VAT group registration applications
• Use its powers to protect tax revenue
• Reject structures facilitating avoidance arrangements

Existing VAT Groups:

HMRC is also reviewing existing VAT groups where these arrangements are suspected.

This may involve:

• Compliance investigations
• Requests for additional information
• Removal of businesses from VAT groups
• Prospective termination notices under Section 43C(1) of the VAT Act 1994

What Care Providers Should Do?

Care providers and charities should:

• Review existing VAT structures carefully
• Seek professional VAT advice before restructuring
• Ensure VAT arrangements have genuine commercial substance
• Avoid artificial VAT recovery schemes
• Maintain full compliance with HMRC regulations

Organisations operating within healthcare and social care sectors should be especially cautious when approached with “VAT saving” arrangements that involve unregulated entities.

Final Thoughts:

HMRC Spotlight 70 sends a clear message that VAT grouping arrangements designed primarily to recover blocked VAT within the care sector are under close scrutiny.

For regulated care providers and charities, maintaining compliant VAT structures is essential to avoid:

• HMRC investigations
• VAT disputes
• Group removals
• Financial penalties
• Reputational risks

Professional advice should always be obtained before implementing any VAT restructuring involving welfare services.

FAQs

What is HMRC Spotlight 70?

HMRC Spotlight 70 is a government notice warning care providers about VAT grouping arrangements that may be considered tax avoidance.

Why are welfare services usually VAT exempt?

Welfare services supplied by regulated care providers and charities are exempt under UK VAT legislation.

Can care providers reclaim VAT on exempt services?

Normally, VAT relating to exempt welfare services cannot be reclaimed.

Why is HMRC reviewing VAT groups in the care sector?

HMRC suspects some VAT group structures are designed mainly to obtain unfair VAT recovery advantages.

Who is affected by these VAT rules?

State-regulated care providers, charities, Local Authorities, NHS ICBs, and healthcare organisations may be affected.

https://www.gov.uk/guidance/vat-grouping-structure-arrangements-used-by-care-providers-spotlight-70