The short answer: is a care home VAT exempt?
Yes, in almost every case a residential care home is VAT exempt on the care it provides. The legal basis is Schedule 9, Group 7 of the VAT Act 1994, which exempts welfare services supplied by a state-regulated provider. A care home registered with the Care Quality Commission, the CQC, is exactly that kind of state-regulated provider, so the weekly fee it charges a resident carries no VAT.
That sounds like good news, and for the resident it is. For the operator it is more double-edged than most owners realise. Exemption is a different thing from zero-rating. A zero-rated business charges 0 percent VAT but still reclaims the VAT on everything it buys. An exempt business charges no VAT and reclaims nothing. The VAT a home pays on its bills, its building work, its agency invoices, sticks as a permanent cost.
So the honest answer to "is a care home VAT exempt" is yes on the income side, and that is precisely why the cost side bites. We will walk through both. If you run a home and you have never had this mapped properly, our healthcare and care sector accountants deal with this exact question most weeks, and the VAT and Making Tax Digital service is built around getting the position right before it costs you.
For the official position, see HMRC's VAT Notice 701/2 on welfare services and goods, and for the regulatory side, the CQC's guidance on registration.
When your care home is exempt: welfare care and CQC registration
Your care home is exempt when it is a state-regulated provider supplying welfare services, and CQC registration is what makes you state-regulated. Those two conditions, regulation plus the provision of genuine welfare care, are the whole test. Meet both and the supply is exempt. Drop either and the position changes.
Welfare services, in HMRC's own words in VAT Notice 701/2, are services directly connected with the care or treatment of elderly, sick, disabled or distressed people. Residential care for older residents, nursing care, dementia care and respite care all sit squarely inside that definition. The accommodation, the personal care, the meals and the support that wrap around them are treated as a single exempt supply of welfare, not as separate taxable bits.
One point that surprises a lot of operators: the exemption follows the nature of the care, not the identity of who pays. A privately funded resident, a council-funded placement and an NHS continuing healthcare placement are all exempt in the same way. The funder does not change the VAT treatment. This matters when a home has a mixed resident base and assumes, wrongly, that local authority income is somehow handled differently for VAT. It is not.
The CQC sits at the centre of this. Lose or lapse your registration and you have lost the thing that anchors the exemption, which is one more reason CQC status is not just a compliance box but a genuine financial lever. A home moving through a new registration, a change in registered manager or a rating challenge is touching the same status that underpins its VAT position, and the two should be looked at together rather than in separate silos.
When you are not exempt: the standard-rated income most homes forget
Not everything a care home earns is exempt welfare care, and the bits that are not can be standard-rated at 20 percent. This is where well-run homes occasionally trip, because the exemption on the core fee lulls people into assuming the whole business is outside VAT. It is not.
The common culprits are income streams that are not the care of your residents. Hiring out a function room or a meeting space to an outside group is a standard-rated supply of facilities. Running a hairdressing salon, a café or a shop that sells to the public rather than just to residents can be taxable. Charging another business a management or consultancy fee, seconding staff out to a third party, or providing catering to a neighbouring organisation can all create standard-rated turnover.
Why does it matter when the home is mostly exempt? Because only taxable supplies count toward the £90,000 VAT registration threshold for the 2025/26 tax year, but once those taxable supplies cross £90,000 in any rolling 12 months, registration becomes compulsory on that slice. A home that quietly built up £95,000 of room hire and external catering would have a registration obligation even though every penny of care income stays exempt. Most homes never get near it. The ones at risk are larger sites and groups with genuine commercial sidelines.
There is a second layer that catches operators out, called partial exemption. If a home does have some taxable income and registers, it can then reclaim only the input VAT that relates to its taxable activities, not the VAT on costs that support the exempt care. The calculation to split the two is fiddly and policed closely. For a home with a small taxable sideline, the recoverable VAT is often modest and the admin is real, which is part of why the default for a pure care home is to stay exempt and unregistered.
What exemption actually costs you: the irrecoverable VAT trap
Exemption costs you every time you pay a bill with VAT on it, because none of that VAT comes back. This is the single most expensive consequence of being exempt, and it lands hardest on the things care homes spend the most on: building works, agency staff, maintenance, utilities and equipment.
Run the numbers on a refurbishment. A £120,000 project priced inclusive of VAT carries roughly £20,000 of VAT inside it. A VAT-registered hotel doing the same work would reclaim that £20,000. An exempt care home cannot, so its real cost is the full £120,000. Scale that to a new wing or a major reconfiguration and the irrecoverable VAT runs into tens of thousands of pounds that never appear as a line anyone budgeted for.
It is not just capital projects. Agency staff are a structural reality in the sector, especially when occupancy is high or a rota gap opens, and agency invoices carry VAT that an exempt home absorbs in full. Maintenance contracts, equipment, professional fees and many supplies all do the same. Over a year these small, irrecoverable slices stack into a number worth seeing in one place, which is what the chart below does for a mid-sized home.
One bright spot sits on the construction side. Certain works on care homes can qualify for VAT zero-rating or the reduced 5 percent rate, for example some conversions and qualifying new builds of relevant residential property. These reliefs are applied by the contractor at the point of invoicing, so they only help if you identify them before the work is priced and agreed. Miss the window and the contractor charges 20 percent that you then cannot reclaim. This is exactly the kind of thing a specialist checks at the planning stage rather than discovering in the year-end accounts.
Here is how the three common approaches actually handle a care home's VAT position:
| What a care home needs | DIY / software | Generic accountant | LOYALS specialist |
|---|---|---|---|
| Confirms welfare exemption against CQC status | ✗ You self-assess | ● If asked | ✓ Built into onboarding |
| Spots standard-rated room hire or retail income | ✗ | ● | ✓ Income split reviewed |
| Prices irrecoverable VAT into a refurbishment | ✗ | ✗ | ✓ Before the spend |
| Checks construction zero-rating before work starts | ✗ | ● | ✓ At planning stage |
| Handles partial exemption if you do register | ✗ | ● | ✓ Calculated and filed |
| Open Mon to Sat for urgent CQC and contract calls | ✗ | ✗ Mon to Fri 9 to 5 | ✓ 10am to 7pm Mon to Sat |
This is why care home operators with real capital spend and mixed income tend to move from a generic accountant to a care sector specialist.
Should a care home ever register for VAT?
Almost never voluntarily, and only ever after specialist advice. A care home whose income is entirely exempt welfare care has no taxable supplies, and you cannot voluntarily register for VAT when you have nothing taxable to register. The default, correct position for a pure residential home is to remain unregistered and treat its care as exempt.
Registration only becomes live in two situations. The first is compulsory: your standard-rated income, the room hire and retail and management charges we covered earlier, crosses £90,000 in a rolling 12 months. The second is structural: some larger groups explore arrangements that deliberately create a taxable supply, often a service charge between connected companies, to make input VAT on a major build recoverable. These VAT recovery structures are heavily scrutinised by HMRC, several have been struck down at tribunal, and they only make sense at real scale with the numbers modelled carefully in advance.
For the overwhelming majority of homes, chasing VAT recovery is the wrong battle. The cleaner wins are on the construction reliefs, on getting the income split right so you never accidentally trip the threshold, and on making sure the irrecoverable VAT is simply built into capital budgets from the start. If you are weighing up whether a specialist would change your position, our guide on specialist versus high-street accountants for a care home walks through where the difference actually shows up, and how much an accountant costs for a care home sets out what the right support runs to.
What this means for you: what to do before your next refurbishment or contract
The practical actions here are about timing and sequencing, because the VAT position is mostly fixed but the cost of it is not. Get ahead of the big decisions and the irrecoverable VAT shrinks. Leave them to the year-end accounts and it is already locked in.
- Confirm your exemption in writing. Make sure your accountant has actually documented that your care income is exempt and your CQC registration anchors it. Do not assume it, especially after a change of registered manager or a new registration.
- Map your income streams. List every source of money, not just resident fees. Flag any room hire, retail, catering or management charges so you know whether taxable income is creeping toward £90,000.
- Check construction reliefs before any build. Ask whether the work qualifies for zero-rating or the reduced 5 percent rate before the contractor prices it. This is the single biggest lever on a capital project.
- Budget the irrecoverable VAT. On any refurbishment, add the VAT you cannot reclaim as a real line in the forecast. A £120,000 project is a £120,000 project, not £100,000.
- Take advice before any recovery structure. If a group wants to explore creating taxable supplies to recover input VAT, model it properly first. The downside of getting it wrong with HMRC is worse than the irrecoverable VAT itself.
- Review it yearly. Occupancy, agency reliance and your income mix all move. A position that was clean last year can drift, so a short annual VAT review keeps it tidy.
None of this is exotic. It is sequencing and attention, applied at the points where care home spend is largest. Done early it saves real money. Left to chance it quietly leaks out as VAT no one budgeted for.