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Care VAT health-check: what you cannot recover and where you can.

The care sector VAT position is counter-intuitive and widely misunderstood. Welfare services provided by a <a href="https://www.gov.uk/guidance/welfare-services-and-goods-notice-7012">CQC-registered provider are VAT-exempt under Group 7 of Schedule 9 to the Value Added Tax Act 1994</a>. That sounds like a benefit. It is not: exemption means you cannot recover the VAT you pay on purchases, so every VAT charge on consumables, equipment, building works and professional fees is a permanent overhead. The review we run maps your supplies, quantifies the irrecoverable cost honestly, identifies where partial exemption or mixed activity creates legitimate recovery, and stress-tests any VAT-grouping structure against <a href="https://www.gov.uk/government/publications/revenue-and-customs-brief-2-2025-the-use-of-vat-grouping-within-the-care-industry/use-of-vat-grouping-within-the-care-industry">HMRC's Revenue and Customs Brief 2/2025</a> before HMRC does it for you.

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VAT-exempt
Welfare services by a CQC-registered provider are exempt under <a href="https://www.gov.uk/guidance/welfare-services-and-goods-notice-7012">Group 7, Schedule 9, VATA 1994</a>; input VAT on related purchases is irrecoverable, a permanent overhead not a perk
£90,000
<a href="https://www.gov.uk/vat-registration/when-to-register">VAT registration is compulsory only once taxable turnover exceeds £90,000</a>; exempt care fees do not count toward the threshold, so a provider with multi-million-pound income may have zero registration obligation
£625/month
Partial-exemption <a href="https://www.gov.uk/guidance/partial-exemption-vat-notice-706">de minimis allows full input-VAT recovery only if exempt input tax averages no more than £625 per month</a> and is under half of total input tax; most care providers will not pass this test

The challenges clients face.

Treating VAT exemption as a tax advantage

The welfare <a href="https://www.gov.uk/guidance/welfare-services-and-goods-notice-7012">VAT exemption</a> removes the obligation to charge VAT on care fees, but it simultaneously removes the right to recover VAT on purchases. For a care home with significant consumable, equipment and maintenance spend, the irrecoverable input VAT is a material cost that must be built into fee rates and budgets, not treated as a saving.

Mixed providers not running partial-exemption calculations

If you make both exempt and taxable supplies (for example a day-centre selling goods or non-exempt courses alongside exempt care), you must apportion input VAT and apply <a href="https://www.gov.uk/guidance/partial-exemption-vat-notice-706">partial-exemption rules</a>. Failing to do so means either overclaiming VAT you were not entitled to, or leaving legitimately recoverable VAT on the table.

Relying on a pre-2025 VAT-grouping structure now under active HMRC challenge

<a href="https://www.gov.uk/government/publications/revenue-and-customs-brief-2-2025-the-use-of-vat-grouping-within-the-care-industry/use-of-vat-grouping-within-the-care-industry">Revenue and Customs Brief 2/2025</a> sets out HMRC's position that VAT-group arrangements designed to convert exempt care supplies into taxable ones constitute tax avoidance. HMRC is refusing new registrations using these structures and exercising powers to remove parties from existing groups. Pre-2025 scheme marketing cannot be relied on.

Assuming a large-turnover care provider must register for VAT

A provider whose entire income is from <a href="https://www.gov.uk/guidance/welfare-services-and-goods-notice-7012">state-regulated welfare services</a> may have total income of several million pounds but zero taxable turnover. The <a href="https://www.gov.uk/vat-registration/when-to-register">£90,000 registration threshold</a> applies to taxable supplies only. Mixed providers must monitor their taxable supplies separately; a single non-exempt revenue stream can trigger registration obligations the rest of the business did not expect.

How we help.

Map your supplies to the welfare exemption and quantify the irrecoverable-VAT cost

We identify which of your supplies fall within the <a href="https://www.gov.uk/guidance/welfare-services-and-goods-notice-7012">Group 7 welfare exemption</a>, which sit outside it, and what the irrecoverable input VAT amounts to across your real cost lines. That figure belongs in your fee model, not as a surprise in the accounts.

Run partial-exemption calculations for mixed activity

For providers with taxable supplies alongside exempt care, we apply the <a href="https://www.gov.uk/guidance/partial-exemption-vat-notice-706">partial-exemption standard method</a> (or assess whether a special method is warranted) and run the de minimis test to establish what input VAT is legitimately recoverable. If the de minimis threshold is not met, we document why so the position is defensible.

Stress-test any VAT-grouping structure against RCB 2/2025

If your structure includes a VAT group, we review it against <a href="https://www.gov.uk/government/publications/revenue-and-customs-brief-2-2025-the-use-of-vat-grouping-within-the-care-industry/use-of-vat-grouping-within-the-care-industry">HMRC's RCB 2/2025 position</a> before HMRC reviews it for you. Where a structure carries risk, we advise on remediation options. Where it is clean, we document why so there is a clear position to defend.

Common questions

Are care home fees VAT-exempt?
Yes, for CQC-registered providers. Welfare services supplied by a state-regulated provider are <a href="https://www.gov.uk/guidance/welfare-services-and-goods-notice-7012">VAT-exempt under Group 7 of Schedule 9 to the Value Added Tax Act 1994</a>. CQC registration as a state-regulated provider qualifies the business. The exemption applies from the date CQC registration is approved, not during the application period.
Can a care home claim VAT back?
Generally no, on costs related to exempt care supplies. Because the care fees are VAT-exempt, <a href="https://www.gov.uk/guidance/welfare-services-and-goods-notice-7012">input VAT on purchases used to make those exempt supplies is irrecoverable</a>. Mixed providers who also make taxable supplies may recover a proportion through <a href="https://www.gov.uk/guidance/partial-exemption-vat-notice-706">partial-exemption calculations</a>, but most care-only providers will not pass the de minimis test.
Do we have to register for VAT if our income is over £90,000?
Only if your <em>taxable</em> turnover exceeds <a href="https://www.gov.uk/vat-registration/when-to-register">£90,000 in the rolling 12-month period</a>. Exempt care fees do not count toward the threshold. A provider whose entire income is from regulated welfare services may have multi-million-pound revenue with zero taxable turnover and no registration obligation. A separate revenue stream (goods sales, non-exempt training) can change this.
What is partial exemption and does it apply to us?
<a href="https://www.gov.uk/guidance/partial-exemption-vat-notice-706">Partial exemption</a> applies when a business makes both VAT-exempt and taxable supplies. Input VAT must be attributed between them, and only the taxable-supply proportion is recoverable. A de minimis test allows full recovery if exempt input tax averages no more than £625 per month and is less than half of total input tax. Most care-only providers do not pass this test, but mixed providers (day centres, goods sellers) should run the calculation.
Is our VAT-grouping structure still safe after RCB 2/2025?
It depends on the structure. <a href="https://www.gov.uk/government/publications/revenue-and-customs-brief-2-2025-the-use-of-vat-grouping-within-the-care-industry/use-of-vat-grouping-within-the-care-industry">Revenue and Customs Brief 2/2025</a> targets VAT-group arrangements that incorporate unregulated entities to convert exempt care supplies into taxable ones, allowing input VAT recovery. HMRC is refusing new group registrations using these structures and removing parties from existing groups. If your structure was set up with that purpose, it needs review now.
Does VAT exemption start when we apply to CQC or when we are registered?
When you are registered. <a href="https://www.gov.uk/guidance/welfare-services-and-goods-notice-7012">HMRC's VAT Notice 701/2 confirms that the exemption applies from the date CQC registration is approved</a>, not during the application period. Supplies made before registration approval are not exempt and must be treated as taxable (assuming the registration threshold is met). This timing matters for providers with a gap between trading and formal registration.

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