Care homes: VAT exemption, the apprenticeship levy and statutory pay

Care groups accumulate entities: an operating company for each home, a property company, a holding company, sometimes a staffing company. Each adds a VAT relationship, a PAYE scheme and a set of accounts. This note covers the three areas where we most often find money being lost, or errors being repeated, across a group: VAT, the levy and the Employment Allowance, and statutory pay.

VAT: exempt supplies, and what that costs

Welfare services supplied by a state-regulated provider are exempt from VAT. For a CQC-registered care home that covers residential care, nursing care and the accommodation that goes with them. Domiciliary care by a regulated provider is exempt on the same basis. The consequence is not that VAT does not matter. It is that VAT becomes a cost. The VAT on agency staff, catering supplies, maintenance, energy and professional fees is input tax attributable to exempt supplies, and it cannot be recovered.

Some income is taxable, and it is usually incidental: management charges from a holding company to the homes, staff supplied to another provider, hairdressing and sundry sales, consultancy. Once taxable income sits alongside exempt income the business is partly exempt, and it can register, or must if the taxable income passes the registration threshold.

Two points catch groups in particular. First, a management charge from the parent to the homes is a standard-rated supply. The parent charges VAT; the homes cannot recover it. A VAT group registration takes intra-group supplies out of VAT altogether, but it brings the whole group into one partial exemption calculation, so it needs modelling rather than assuming. Second, where a property company lets a home to the operating company, the option to tax is disapplied for a building used for a relevant residential purpose, so the rent is exempt and the property company cannot recover VAT on the building. Construction of a new care home, by contrast, can be zero-rated with the right certificate. These are the sector VAT positions we set out for each entity before the first return.

Partial exemption in practice

A partly exempt business recovers input tax in three parts: all of the VAT on costs used only for taxable supplies, none of the VAT on costs used only for exempt supplies, and a proportion of the VAT on overheads. The standard method sets that proportion by the ratio of taxable to total supplies. If the exempt input tax is small enough to fall within the de minimis limits, all of it can be recovered.

The calculation is done each quarter, then reworked for the whole year in an annual adjustment, which is the step most often missed. Where the standard method gives an unfair result, for example because a small amount of taxable income carries a disproportionate share of overhead, a special method can be agreed with HMRC in writing. And where a home has been built or refurbished at a cost above the Capital Goods Scheme threshold, the recovery on that spend is adjusted over ten years as the use changes. Method selection, de minimis testing and the annual adjustment are the core of our partial exemption work.

The apprenticeship levy across a group

The levy is charged on the pay bill of every employer above the annual allowance. The allowance is not one per company. Connected companies, which for a care group means every entity under common control, share a single allowance and must decide at the start of the tax year how to split it between them. The split cannot be changed once the year has started. A group that lets each home’s payroll claim the full allowance is under-paying the levy. A group that forgets to allocate it to the entity with the largest pay bill is over-paying.

The Employment Allowance works the same way in one respect: connected companies get one allowance between them, claimed by one nominated employer. Both are reported through the Employer Payment Summary, so both go wrong quietly when payrolls are run entity by entity by different people. The connected company rules and the allocation are covered under Employment Allowance and apprenticeship levy.

Statutory pay across sites

Care has more maternity, sickness and shared parental leave than most sectors, and more staff moving between entities. That combination produces the errors we correct most often.

• Continuity of employment. A carer who moves from one home to another within the group keeps her continuous service for statutory maternity pay, because the companies are associated employers. A payroll that treats the move as a new start refuses SMP wrongly.
• Average weekly earnings. SMP is based on earnings in the eight weeks before the qualifying week, including overtime and enhancements. Basic pay alone understates it. A pay rise awarded between the start of that period and the end of maternity leave has to be fed back into the calculation, under the Alabaster rule.
• Recovery. SMP paid is recovered from HMRC through the EPS, in full plus compensation for small employers, or at the standard percentage for larger ones. Where the EPS is not completed, the recovery is simply never claimed.
• Statutory sick pay. The rules changed in April 2026. The waiting days were removed and the lower earnings limit no longer excludes the lowest paid, who receive a percentage of their earnings instead. A payroll that has not applied the change is under-paying a workforce with high absence, across every site at once.

Correcting these, and recovering what was never claimed, is our most common statutory payments work for care clients.

Multi-entity reporting

Group-level questions need group-level numbers. We set up each home’s chart of accounts on the same structure, so occupancy, fee income per bed, agency cost per shift and staff cost as a share of fees read across every site. Intercompany balances are reconciled monthly, not at the year end. The consolidated accounts, where the group is required to prepare them, then follow from the management accounts rather than being rebuilt from scratch.

Acquisitions are accounted for properly at the outset, with the freehold, the leasehold and the goodwill separated, because that split drives the accounts, the tax and the lender reporting for years afterwards.

If you run more than one entity and are not certain the VAT, the levy or the statutory pay is right across all of them, we offer a 30-minute call at no charge. Bring the group structure chart and we will tell you where to look first.