Are care home fees VAT exempt?
Welfare services supplied by a CQC-registered provider are VAT-exempt under Group 7 of Schedule 9 to the Value Added Tax Act 1994. HMRC's Notice 701/2 confirms that providers registered with the Care Quality Commission qualify as state-regulated welfare institutions and their core care services fall within that exemption. Exemption takes effect from the date CQC registration is approved; the period before registration approval is not covered. For most residential and domiciliary care businesses, the bulk of fee income is therefore outside the VAT system entirely.
That sounds like a straightforward benefit. It is not.
Why exemption costs you money: the input-VAT trap
Exempt status means the provider cannot recover VAT on purchases used to make those exempt supplies. That is the trade. Every pound of VAT charged on consumables, care equipment, building works, professional fees and IT systems used in running a care home becomes a permanent overhead that cannot be clawed back from HMRC.
For a care home spending, say, £500,000 a year on maintenance, equipment and professional services at a blended 20% VAT rate, £100,000 of input VAT disappears into the cost base each year. Over a five-year period that is half a million pounds of unrecovered tax. None of it is optional: the welfare exemption is mandatory under the VATA 1994, not a choice the provider makes.
Operators who understand this build the VAT cost into their fee models from the outset. Those who do not tend to discover it during a financial review when the numbers do not add up.
Do you have to register for VAT?
A purely exempt provider has no VAT registration obligation, regardless of how large the care fee income becomes. The £90,000 compulsory registration threshold tests taxable turnover only. Exempt income does not count. A single nursing home generating £3 million a year in care fees has zero taxable turnover and no registration duty if every supply is welfare-exempt.
This surprises providers who conflate total income with taxable income. The test is specific and it matters: being caught inside the VAT system unnecessarily creates compliance cost and, for exempt businesses, no corresponding benefit.
Voluntary registration is available but rarely makes sense for a purely exempt provider, because registration does not unlock input-VAT recovery on exempt supplies. The only scenario where voluntary registration has practical value is a business that also makes genuine taxable supplies and wants to recover the input tax on shared overhead against those taxable outputs.
The mixed-provider trap: when part of your income is taxable
Many care businesses are not purely exempt. The VAT position becomes more complex the moment any part of the income is taxable. Common examples:
- A day centre that sells goods (craft materials, meals to visitors) or runs non-exempt training courses
- A domiciliary agency that provides non-CQC services (cleaning, companionship visits without personal care) that do not fall within the welfare exemption
- A care group with a catering or laundry subsidiary that supplies services to third parties
Once a business has taxable income streams, the taxable turnover counts toward the £90,000 threshold and, if the provider is already registered, the split between exempt and taxable supplies triggers the partial exemption rules.
The table below illustrates which income lines count toward the VAT threshold for a mixed care provider:
| Income line | VAT status | Counts toward £90k threshold? |
|---|---|---|
| Residential care fees (CQC-registered, welfare) | Exempt | No |
| Domiciliary personal care (CQC-registered) | Exempt | No |
| Day centre meals sold to non-residents | Standard-rated | Yes |
| Non-exempt training courses | Standard-rated | Yes |
| Companionship visits (no personal care, not CQC-regulated) | Standard-rated | Yes |
| NHS-funded nursing care (FNC top-up) | Exempt (welfare supply) | No |
Partial exemption and the de minimis test
Where a VAT-registered provider makes both exempt and taxable supplies, HMRC's partial exemption rules require input VAT to be attributed between the two. Only the input tax that relates to taxable supplies can be recovered; the rest is blocked.
The de minimis test provides relief for businesses where the exempt input tax is small. Full input-VAT recovery is allowed if exempt input tax satisfies both of the following conditions:
- It does not exceed £625 per month on average (£7,500 per year)
- It is less than half of total input tax in the period
Both conditions must be met. For most care providers with even modest levels of VAT-bearing expenditure, the monthly average test will be the binding constraint. The worked example below shows a small domiciliary agency that also runs non-exempt cleaning services:
| Quarter | Annual equivalent | |
|---|---|---|
| Total input VAT incurred | £18,000 | £72,000 |
| Input VAT attributable to taxable (cleaning) supplies | £2,400 | £9,600 |
| Input VAT attributable to exempt (welfare) supplies | £15,600 | £62,400 |
| Monthly average of exempt input tax | £15,600 / 3 = £5,200 per month | |
| De minimis test result | FAIL (£5,200 exceeds £625 limit) | |
| Input VAT recoverable | £2,400 only (taxable-supply portion) | |
| Input VAT permanently lost | £15,600 for the quarter | |
Providers with minimal taxable activity will rarely pass the de minimis test. The partial exemption calculation is not optional once you are in the VAT system with mixed supplies; HMRC expects it to be run each period.
RCB 2/2025: why the old VAT-grouping schemes are now a live HMRC risk
Over many years, specialist advisers marketed VAT-grouping structures to care operators. The basic design inserted an unregulated entity into the supply chain between the care home and its customers. Because the unregulated entity was not a state-regulated welfare provider, its supplies were argued to be taxable rather than exempt, creating an output VAT position that could then be offset against the full input VAT on the group's costs. The result, if accepted, was partial or full input-VAT recovery across the group.
Revenue and Customs Brief 2/2025 ended any reasonable argument that these structures are safe. HMRC's position is clear:
| Period | What was happening | HMRC's position now |
|---|---|---|
| Pre-2025 | Scheme marketed as established planning; some groups registered using VAT-grouping structures | These arrangements are characterised as avoidance |
| RCB 2/2025 published | HMRC sets out its legal analysis and enforcement stance | New VAT group registrations using these structures are refused |
| Post-RCB 2/2025 | Existing groups operating these arrangements remain under review | HMRC is exercising its power to remove parties from existing VAT groups |
Any provider currently inside a VAT-grouping structure that was designed to unlock input-VAT recovery on welfare supplies, or that is being pitched such an arrangement, needs specialist advice before the next VAT return. The potential exposure includes the VAT not charged on supplies that HMRC now argues were taxable, penalties, and interest.
Pre-2025 marketing materials that described these schemes as "established" or cited historic recovery figures cannot be relied on. The enforcement landscape has changed.
Edge cases where the VAT position is genuinely not obvious
The welfare exemption has clear edges. Three situations arise regularly where the position is genuinely uncertain and operators should not rely on assumptions:
1. Construction of a new care home
The welfare exemption applies to the supply of care services. It does not automatically determine the VAT treatment of the construction contract that builds the home. New-build construction VAT involves a separate analysis that turns on the nature of the building, how it is used, and whether any zero-rating for certain types of construction applies. This is a fact-specific area that sits outside the standard welfare-exemption framework covered in HMRC Notice 701/2.
The practical point: the VAT position on a major construction project should be reviewed before contracts are signed, not discovered when the first invoice arrives. See our guide on capital allowances for care home fit-out for the income-tax treatment of qualifying expenditure.
2. Supported living: the rent-plus-care split
Supported living arrangements typically involve a tenancy agreement for accommodation and a separate care-support contract. The accommodation element is likely to be exempt as a supply of land (under Group 1 Schedule 9 VATA 1994), which is a different exemption from the welfare exemption. The care element falls under Group 7 provided the provider is CQC-registered for those activities.
Where the two elements are combined into a single charge, the allocation between accommodation and care matters for the VAT analysis, particularly if the provider is also making taxable supplies. Supported-living providers should ensure their contracts, invoicing and VAT analysis reflect the actual structure of what is being supplied. Our supported-living hub sets out the specific financial compliance considerations for this model.
3. CHC-funded placements: the supply is to the NHS
Where a resident qualifies for full NHS continuing healthcare, the NHS funds the entire package. The provider's supply is to the NHS commissioning body, not to the individual resident. This changes the VAT analysis because the nature of the customer and the contractual relationship are different from a standard self-funder or local authority placement.
This should not be confused with NHS-funded nursing care (FNC), which is a weekly top-up paid by the NHS toward the nursing component of a nursing-home placement where the resident does not qualify for full CHC. FNC does not change the fundamental structure of the supply in the same way. Conflating the two is a consistent source of error in care-home accounts and VAT filings.
What a care VAT review actually checks
For most care providers, the VAT position is settled and the question is whether it has been applied correctly and consistently across the business. A structured review covers:
- Confirming the CQC registration scope matches the supplies being treated as exempt
- Checking whether any income streams are taxable and whether the registration threshold has been crossed
- Running partial exemption calculations for mixed providers and confirming the correct attribution method is in use
- Reviewing any VAT-group membership in light of RCB 2/2025
- Identifying fact-specific edge cases (construction, CHC, supported living) that need individual analysis
If the business has changed, acquired a new site, added income streams, or received a pitch for a VAT-grouping arrangement in the past two years, a review is the right starting point. Our care VAT review service covers each of these areas as a structured engagement.
Providers who are simply unsure of their current position can also start with a conversation through our care homes hub or the care startups hub if this is a new venture where the VAT position needs to be established from day one.