Can a care home reclaim the VAT its accountant adds to the fee?
For most care homes, no. A new accountant can quote a lower monthly fee and still cost you more, because the VAT they add is usually money you never see again. A residential care home's income is exempt from VAT, and the rule is simple: you cannot reclaim VAT on things you buy to make exempt supplies. The accountant, the solicitor, the recruitment agency and most of your professional bills all carry 20 percent VAT that the home absorbs as a plain cost.
That turns a familiar comparison on its head. A proposal of 1,200 pounds a month "plus VAT" is 1,440 pounds a month out of your bank account, because you keep the whole 240 pounds of VAT. A rival quoting 1,350 pounds all in is cheaper, even though its headline looks higher. Before you move accountant on price, you have to compare the gross figures, and you have to be sure about your home's VAT status. This guide is written by LOYALS, a King's Cross firm of accountants and business consultants that handles VAT returns and Making Tax Digital and monthly accounts for care homes across London, and the position below is the one we check for every care client before we talk about fees.
Is VAT even charged on accountancy fees?
Yes. Accountancy is a standard-rated service, so once a firm is VAT registered it must add VAT at the standard rate of 20 percent to its fee. There is no special exemption for professional fees charged to a care home, and there is no reduced rate. The standard VAT rate confirmed on GOV.UK has stood at 20 percent since 2011, so you can take "plus VAT" to mean a fifth on top every time.
This is where owners get caught. The quote in front of you shows 1,200 pounds, the cheaper number, and the VAT is a line you skim past because you assume it washes out the way it does for a normal trading business. A shop or a builder adds VAT to its sales, reclaims the VAT on its costs, and only hands HMRC the difference, so the accountant's VAT is neutral to them. A care home is not in that position, and the next section is why.
So the real question was never whether VAT is on the invoice. It is whether your home is the kind of business that gets VAT back. Settle that first and the fee comparison becomes straightforward. Get it wrong and you can switch to a "cheaper" accountant and quietly pay more every month for years. Our care home accounting team sees this on nearly every proposal an owner brings us to sanity-check.
Why your care home usually cannot reclaim that VAT
Because your care income is exempt, not zero-rated, and those are very different things. Care and accommodation provided as part of a care package by a state-regulated residential home are exempt from VAT under the welfare rules, as set out in HMRC's welfare services VAT notice (701/12). Exempt means you do not charge VAT on your fees to residents or to the council, which sounds like good news, and for your billing it is. The sting is on the other side.
When your sales are exempt, HMRC treats the VAT on your purchases as the final cost of making those exempt supplies, so you cannot claim it back. GOV.UK puts it plainly in its guide to reclaiming VAT on business expenses: you cannot reclaim VAT on goods and services your business uses to make VAT-exempt supplies. Your accountant's work supports your exempt care business, so the VAT on their fee sits in that bucket. The same goes for your solicitor, your HR adviser and most professional costs tied to running the home.
There is a second reason many homes recover nothing: they are not VAT registered at all. Registration is driven by taxable turnover, and exempt care income does not count towards the 90,000 pound threshold. A home whose income is wholly exempt usually cannot register, so there is no VAT return in the first place and no mechanism to reclaim a penny. Whether recovery is even on the table comes down to which of three positions your home is in.
That is the whole game. A fully taxable business reclaims the VAT in full. An exempt care home, which is most residential homes, reclaims nothing. A home with a genuine mix of taxable and exempt income sits in the middle and can recover a proportion, but only if it clears the partial exemption test in the next section. Knowing which column you are in is what tells you whether a "plus VAT" quote is a real cost or a wash.
What if you have some taxable income too?
Then you are partly exempt, and you can recover part of the VAT, but less than you might hope. Some homes do have taxable income: a shop or hairdressing concession, certain consultancy, or short lettings of a function room, for example. Once you are VAT registered because of taxable income, you use the partial exemption rules to split your VAT on costs into three: VAT that relates only to taxable sales (recoverable), VAT that relates only to exempt care (not recoverable), and VAT on general overheads like the accountant, which is shared and recovered in the taxable proportion.
Here is the relief that catches people out in a good way. Under the de minimis rule you can recover all of your exempt-related VAT if it stays below both limits: an average of 625 pounds a month, and no more than half of your total input VAT for the period. Both conditions have to be met. HMRC's partial exemption notice (706), updated in December 2025, sets out that 625 pounds a month test, which works out at roughly 7,500 pounds across a full year. A small home with modest exempt overheads can slip under it and recover the lot. A larger home, or one with heavy exempt costs, will blow through the 625 pound limit and keep only the taxable share.
For the fee comparison this matters, but less than owners expect. If your home is wholly exempt, nothing changes: the VAT is a cost, full stop. If you are partly exempt and over the de minimis limits, you might recover a slice of the accountant's VAT, maybe 10 or 20 percent if that is your taxable proportion, so the irrecoverable part is still most of it. Only a home where taxable activity is genuinely significant gets close to full recovery, and that is rare for a residential care home. The safe planning assumption, unless you have checked, is that the VAT is a cost.
How to compare two accountant quotes when you cannot reclaim the VAT
Put both proposals onto the gross figure you actually pay, then compare those. It takes two minutes and it is the single check that stops a "cheaper" switch costing you money. Work through it like this.
- Find your recovery rate. Wholly exempt home, it is zero. Partly exempt and over de minimis, it is your taxable recovery percentage. Partly exempt and under de minimis, it is 100 percent. If you are not sure, treat it as zero until an accountant confirms otherwise.
- Gross up each quote. Take the monthly fee, add 20 percent VAT, then subtract whatever your recovery rate gives back. For a wholly exempt home that is simply fee plus VAT.
- Compare the gross monthly figures, not the headlines. The lower pre-VAT number is often the higher real cost once the irrecoverable VAT is in.
- Multiply by twelve and by the term. A 90 pound monthly gap is over 1,000 pounds a year, and most engagements run for years, so a small monthly difference is a real decision.
The chart below runs that method on a realistic example: a 50-bed home weighing a new quote of 1,200 pounds a month plus VAT against an incumbent charging 1,350 pounds all in.
On the headline, the new accountant looks 150 pounds a month cheaper. On the gross cost a wholly exempt home actually pays, the new quote is 1,440 pounds against 1,350 pounds, so it is 90 pounds a month dearer, which is 1,080 pounds a year going to HMRC for nothing you can reclaim. The "saving" was an illusion created by reading the number before VAT. None of this means you should never switch, and a genuinely better accountant can be worth more than the fee gap. It means you make that call on the real cost, with your VAT status pinned down first.
What this means for you: what to do before you sign
Settle three things before you commit to any accountant on price. First, confirm your VAT status in writing: wholly exempt, partly exempt, or not registered, because that single fact decides whether the VAT on fees is a cost or not. Second, ask every firm to quote the gross monthly figure, VAT included, so you are comparing like with like rather than one number before VAT and another after. Third, if a quote is "plus VAT", ask the firm directly whether they expect your home to recover it, because an accountant who understands care will know the answer is usually no, and one who shrugs is telling you something about their experience with homes like yours.
If your home does have taxable income, it is worth a proper look at partial exemption, because getting under the de minimis limits, or organising your costs so more VAT is directly attributable to taxable activity, can genuinely claw some back. That is a planning job, not a guess. LOYALS is a King's Cross firm of accountants and business consultants that reviews the VAT position, prices on the gross cost and runs the VAT returns, payroll and monthly accounts for care homes across London, and we would rather show you that a cheaper headline is dearer than win you on a number that does not hold. Ask our VAT returns and Making Tax Digital team to review recovery of VAT on the service you are being offered before you move.
Running a home and weighing this up between a dozen other jobs? Our specialist care home accountants handle the VAT position, payroll, resident and funder invoicing and the monthly numbers so the finance side holds together while you run the home.