Welfare services and care: VAT exemption

Care and welfare services are exempt from VAT under Item 9 of Group 7, Schedule 9 to the VAT Act 1994, but only when the supplier is a charity, a public body or a state regulated private welfare institution or agency. The identical service from an unregulated private business is standard rated. Exemption means no VAT is charged to the person receiving care, but the provider generally cannot reclaim the VAT on its own costs.

What does the welfare exemption actually cover?

Item 9 exempts the supply of welfare services, and of goods supplied in connection with those services, by three kinds of provider: a charity, a state regulated private welfare institution or agency, or a public body. Note (6) to Group 7 defines welfare services as services directly connected with:

• the provision of care, treatment or instruction designed to promote the physical or mental welfare of elderly, sick, distressed or disabled persons
• the care or protection of children and young persons
• the provision of spiritual welfare by a religious institution as part of a course of instruction or a retreat, provided it is not designed primarily to provide recreation or a holiday

Two limits sit in the notes. For a state regulated private welfare institution, the exemption covers only the services for which it is regulated (Note (6)). Accommodation and catering are excluded unless they are ancillary to the care, treatment or instruction (Note (7)). Item 10 separately exempts goods and services incidental to spiritual welfare that a religious community supplies, otherwise than for profit, to its resident members in return for a subscription or other payment made as a condition of membership.

HMRC’s guidance in VAT Notice 701/2 adds practical conditions for care services: the recipient must be elderly, sick, distressed or disabled; the care must form part of a specific individual care plan; and an appropriately trained person must have assessed the recipient’s health condition and needs. Exempt examples include personal and nursing care, counselling, supervising vulnerable people and residential care provided as part of a care package.

Which providers can apply the exemption?

Provider	What the law or HMRC requires
Charity	Evidence of registration with the Charity Commission for England and Wales, or, if not registered there, evidence of formal recognition by HMRC as a charity for tax purposes (Notice 701/2, paragraph 3.1)
Public body	A government department, a local authority, or a body acting under an enactment for public purposes and not for its own profit that performs similar functions (Note (5))
State regulated private institution or agency	Approved, licensed, registered or exempted from registration by a Minister or other authority under a public general Act (Note (8))

Notice 701/2 lists the regulators it has in mind: the Care Quality Commission, Ofsted, Care and Social Services Inspectorate Wales, the Northern Ireland Regulation and Quality Improvement Authority, the Scottish care regulator and any similar regulatory body. State regulated agencies include domiciliary care agencies, independent fostering agencies, voluntary adoption agencies and nurses’ agencies.

The private sector route is relatively recent. HMRC’s manual at VATWELF2020 explains that before 21 March 2002 only a charity or public body acting otherwise than for profit could exempt welfare services. Statutory Instrument 2002/762 added state regulated private welfare institutions and removed the not for profit condition, and Statutory Instrument 2003/24 added the word agency, bringing in domiciliary care and fostering agencies. In Kingscrest (case C-498/03) the European Court confirmed that a profit making body could fall within the exemption (VATWELF2120).

Why does registration with the care regulator decide the VAT position?

Because Item 9 names the provider, not just the service, the regulator’s decision is the trigger. HMRC accepts that a welfare provider is not state regulated until the relevant regulator has approved its registration, so it cannot exempt its welfare services while an application is pending (VATWELF2160 and Notice 701/2, paragraph 3.3.2). Care supplied in that gap is taxable.

The courts have backed this strict reading. In the joined appeals of LIFE Services Ltd and The Learning Centre (Romford) Ltd, both private providers of day care to vulnerable adults in England that were not regulated by the Care Quality Commission, the Court of Appeal gave judgment on 25 March 2020 and the Supreme Court refused permission to appeal on 15 January 2021. The court held that LIFE Services was not state regulated and that treating regulated and unregulated providers differently did not breach fiscal neutrality (VATWELF2095).

Regulation also sets the outer edge of the exemption. Only activities regulated by the relevant body are exempt, although HMRC accepts that this includes all care and treatment services provided within a regulated residential care home (Notice 701/2, paragraph 3.5).

Which children’s services and goods are included?

For children, Notice 701/2 treats as exempt, when supplied by a qualifying provider: care in a children’s home; day care such as a nursery, playgroup or after school club; the placement of a child with foster carers by a fostering agency; the care, support and protection of looked after children; and the training and assessment of prospective adopters by an adoption agency. Activity based clubs, such as dance classes, football lessons, soft play and children’s entertainment, are not welfare. Nor is carer training not linked to a specific child, consultancy or education.

Holiday clubs sit near that line. In RSR Sports Limited (TC07453, 7 November 2019) the tribunal found that Ofsted registered holiday camps were predominantly childcare rather than activities, because staff supervised rather than coached. HMRC now accepts that clubs showing those features can qualify (VATWELF3032).

Goods supplied as part of an exempt welfare service are also exempt: meals provided to beneficiaries with no additional charge, bandages and ointments used in home care, and books, crayons and toys used by a nursery in providing care. Goods that can be separated from the welfare service are not exempt.

What happens when a council or third party pays for the care?

HMRC’s position in Notice 701/2, section 5, and VATWELF5000 is that care provided by a state regulated agency to the person who needs it stays exempt even when a local authority contracts for it and pays the bill. The agency’s staff work for the agency throughout, so it supplies welfare, not staff (Age Concern Leicester and Rutland [2009] 20762). By contrast, an employment business that supplies workers to a third party which is legally responsible for providing the care makes a taxable supply of staff.

Under direct payment schemes, where a council pays the person assessed as needing care so they can buy it themselves, welfare services from a charity or state regulated provider are exempt, but the same services from any other supplier are standard rated. An agent’s commission or fee for arranging care is standard rated. HMRC also treats payroll services sold to direct payment recipients who employ their own personal assistants as standard rated: the First tier Tribunal decision in favour of Cheshire ([2019] UKFTT 354 (TC)) was set aside by the Upper Tribunal by consent, and HMRC says it will reject claims on materially similar facts (VATWELF3023).

What does exemption mean for VAT recovery and registration?

Notice 701/2 states that a provider of exempt welfare services is generally not entitled to reclaim VAT incurred on the costs of making those supplies. A provider whose supplies are mostly exempt may not need to register at all, because the VAT registration threshold is tested on taxable supplies. A provider that makes some taxable supplies below the threshold can register voluntarily. Where it makes both taxable and exempt supplies, the partial exemption rules decide how much input tax it can recover. The difference between this outcome and zero rating is explained in zero rated vs exempt supplies.

Two further points apply to charities. Welfare services and related goods supplied consistently below cost to distressed people for the relief of their distress are not a business activity at all (Notice 701/2, paragraph 3.1.1), which can open up the separate VAT reliefs for charities on purchases. And welfare advice or information aimed at groups rather than a specific individual, supplied for a charge by a charity or a state regulated provider, is reduced rated at 5% under Schedule 7A, Group 9. That reduced rate does not extend to a charity’s trading subsidiary, and goods qualify only where at least 90% of their purpose is conveying the advice.

Illustration only. A domiciliary care company bills £30,000 a month for personal care to elderly clients. Once its Care Quality Commission registration is approved, those fees are exempt and carry no VAT, but VAT of £400 on a £2,000 software purchase used for the care work is attributable to exempt supplies and normally cannot be reclaimed. If the same fees were billed in the weeks before registration was approved, they would be taxable. For a VAT registered business charging a VAT inclusive £30,000, the VAT element would be £5,000 (one sixth).

What mistakes come up most often?

• Treating care as exempt from the date an application is submitted rather than the date the regulator approves it.
• Assuming every service of a regulated business is exempt, when only regulated welfare activities qualify.
• Exempting activity clubs, carer training or consultancy that is not directly connected with the care of an identified person or child.
• Describing a staff supply contract as care, or a care contract as staff supply, without checking who is legally responsible for the care and who directs the workers. HMRC notes that contract wording alone does not decide the liability if practice differs (VATWELF5000).

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Related Accountapedia entries

• VAT on education and private school fees
• Sport and physical education: VAT exemption
• VAT on training courses and CPD
• Health and medical services: VAT exemption
• Membership subscriptions and VAT

Sources

• legislation.gov.uk: Act 1994 c. 23, schedule 9
• GOV.UK: Welfare services and goods notice 7012
• GOV.UK: www.gov.uk
• GOV.UK: www.gov.uk
• GOV.UK: www.gov.uk
• GOV.UK: www.gov.uk
• GOV.UK: www.gov.uk
• GOV.UK: www.gov.uk
• GOV.UK: www.gov.uk

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.