Following the publication of Revenue and Customs Brief 2 (2025) on 24 April 2025, HMRC has now begun writing to local authorities seeking information regarding their contractual arrangements with welfare providers.

HMRC Information Requests

In recent correspondence, HMRC has asked local authorities to provide information, specifically requesting them to:

• Advise whether welfare contracts have been reviewed following the publication of RCB 2(2025), and if not, to conduct such a review.
• Confirm if welfare suppliers have taken appropriate action and made contact to amend their contracts, including details of any ongoing discussions.
• Advise whether any welfare suppliers are seeking to maintain historic contracts and VAT group structures that may be of concern.

Local Authority Considerations

At the time of writing, the correspondence we have seen appears to represent a request for voluntary assistance rather than a formal information notice. If your authority receives such a letter, we recommend first asking HMRC to clarify the statutory basis for the request, including whether it has been made under a formal information notice or another legislative power.

Taxpayers are not obliged to comply with the types of HMRC requests we have seen, but local authorities will, understandably, wish to cooperate with HMRC where they can. However, responding to these requests may require authorities to identify, review and collate information across a significant number of welfare contracts, which could require a considerable commitment of finance and legal officer time. Clarifying the basis of HMRC’s request before committing significant resources will help authorities determine the most appropriate response.

Authorities may also wish to ask HMRC whether the request relates to concerns about a specific welfare provider or VAT group arrangement and, if so, request further details. This will help authorities understand any potential implications for their own VAT position and determine the most appropriate next steps.

VAT Incurred on Welfare Contracts

The publication of Revenue and Customs Brief 2 (2025) does not, in itself, change existing contractual arrangements.

Where contracts remain in place with non-regulated entities or non-charitable providers, VAT will continue to be charged in accordance with those contractual arrangements until they are amended or terminated. Subject to the normal VAT recovery rules, VAT incurred by local authorities remains recoverable in the usual way.

How PSTAX Can Help

We can assist local authorities in reviewing and drafting responses to HMRC correspondence, including advising on the information requested and the appropriate approach to responding.

Separately, we continue to offer our due diligence risk assessment. Introduced by PSTAX when these VAT grouping risks first emerged, the review helps authorities assess existing contractual arrangements, understand potential VAT risks and identify where further action may be appropriate.

Whether you require assistance responding to HMRC’s correspondence or would like to review your existing contractual arrangements, please contact the team.

Contact the team