Charities have been encouraged to wind down their use of an "aggressively marketed” scheme which boosts VAT recovery for care providers that are regulated by the Care Quality Commission.

HM Revenue and Customs said it had identified a scheme involving the growing use of VAT grouping structures by state-regulated providers to recover VAT on welfare service supply costs that would otherwise be exempt from VAT.

The government department published a brief last week which detailed its plans to end a scheme and HMRC said it would make full use of its powers to protect VAT revenue and, where necessary, refuse new group registration applications that are designed to implement VAT grouping structures.

The move could affect charities that provide care, use unregulated bodies to make their charges liable to VAT, and charge local authorities or NHS integrated care boards.

Professional advisers who work with such charities could also be affected.

A spokesperson for the Charity Tax Group said: “We understand from HMRC that this scheme has been aggressively marketed and that some charities may therefore have entered into this sort of arrangement.

“HMRC is encouraging anyone operating in this way who now wishes to unwind the scheme to get in touch with them via email.”

HMRC has launched an investigation to review and investigate all instances where it is known or suspected that an avoidance scheme is in operation within a VAT group arrangement, the department said.

During the investigation HMRC could request additional information and remove relevant parties from VAT groups where necessary.

HMRC is encouraging relevant parties to email CAGetHelpOutOfTaxAvoidance@hmrc.gov.uk and include the words ‘VAT grouping’ in the subject line.