VAT and Cosmetic Procedures: Policies and Common Misconceptions
As seen in the Journal of Aesthetic Nursing, Michael Geary, Consentz CEO joins Tamara Habberley, VAT Consultant, to demystify some of the myths surrounding VAT in the medical sector.
VAT and Cosmetic Procedures: Policies and Common Misconceptions
VAT is one of the most attractive taxes for governments around the world, as it is very easy to assess. For example, 20% of sales of a business is significantly easier to calculate than determining the profit of a company. The downside to VAT, however, is that it is regressive; it punishes the less well-off who need to buy goods and services, irrespective of their income. To address this imbalance, governments give VAT exemptions or apply zero-rated VAT to critical areas of the economy, such as food, children’s clothes and medicine. So how does this impact on aesthetic practitioners?
Misconceptions About VAT
It is a common misconception that the services a registered medical practitioner supplies will be automatically exempted from VAT. In part, this comes from UK tax authority HMRC’s previous policy, where the department accepted that any procedure carried out by a registered medical practitioner, using their medical skills, would be exempted from VAT because to do otherwise would hurt the less well-off. This policy changed following a European Court of Justice (ECJ) decision in the 2005 case of Dr Peter d’Ambrumenil v CCE; Dispute Resolution Services Ltd v CCE that looked at the VAT treatment of medical reports provided by GPs. The reports were commissioned to allow insurance companies and others to make decisions in respect of an individual, such as paying out insurance compensation, rather than to allow decisions to be made on the medical care required by the individual.
The ECJ found that exemption only applied where the service was primarily intended to protect, maintain or restore the health of an individual. Supplies made by a medical practitioner that had a different primary purpose were subject to VAT.
HMRC initially only applied this ruling to medical report services; however, the present policy dictates that exemption can only apply where:
- Services are within the profession in which a medical practitioner is registered to practice
- The primary purpose of services is the protection, maintenance or restoration of the health of the person concerned. Services not aimed at the prevention, diagnosis, treatment or cure of a disease or health disorder are subject to VAT.
Treatments that are intended for purely cosmetic reasons are subject to VAT, whether delivered by a registered medical practitioner or in a state regulated environment, such as a hospital. This creates potential exposure for medical practitioners who deliver aesthetic procedures. Considering the multitude of treatments on the market, and people’s needs and motives for them, this is far from ideal. Many cosmetic procedures are performed for the health of the person, either mental or physical, so how does a medical practitioner support the fact that a treatment is required for clear therapeutic purposes? At present there is no definitive answer to this, as HMRC has not released formal guidance for clinicians to rely on. Notwithstanding this uncertainty, the HMRC’s present position is built on its understanding of the Skatteverket v PFC Clinic AB case in 2013.
First, the HMRC will not accept the position of 100% exemption without consideration of whether there was therapeutic purpose by the practitioner on a case-by-case basis. Skatteverket v PFC Clinic AB supports the need for the following for a treatment to be exempt from VAT:
- The treatment is not purely cosmetic
- The procedure needs to be intended for therapeutic purposes, so there needs to be diagnosis of a medical condition. It is worth bearing in mind that preventative medicine falls within the exemption; however, HMRC will most likely require the treatment to be closely connected with a possible condition, rather than being simply good for the patient
- Each treatment should address the presenting condition and needs to be assessed on a case-by-case basis. There needs to be a clear link between the treatment proscribed and the diagnosis. It is not sufficient to simply diagnose depression and receive a cosmetic treatment to resolve the underlying medical issue.
Evidence to support the therapeutic purpose is key to persuading HMRC (often supported by an expert appointed by it) to grant a VAT exemption. Therefore, it is essential to retain a clear audit trail from the initial evaluation of the patient’s need for the procedure through to the delivery and re-evaluation of the patient’s health post treatment. This means that a comprehensive recording system is required to track the relevant information.
It is important to note that patients cannot self-certify their requirement for treatment—this must be diagnosed by a suitably qualified medical practitioner. To achieve the necessary support for the exemption claim, it is recommended that practitioners have a process in place that captures and answers the key questions directly, including a formal sign-off sheet that is completed or approved by the medical practitioner involved. These questions address:
- Whether the medical practitioner takes the view that the treatment is therapeutic or not
- If it is therapeutic, the diagnosis should be stated along with an analysis
- How the treatment will address the condition that has been diagnosed
Chances of Acceptance
HMRC is likely to reject exemption applications based on patients having perceived mental health issues. Evidence such as patients being referred by their GP or primary care trust for treatment is clearly unlikely to be challenged when used to support exemption applications.
Treatments that HMRC is likely to accept as VAT-exempt, as they are aimed at alleviating a physical or medical condition, include, but are not confined to:
- The removal of skin tags and warts
- Acne treatment
- Toxin treatment for hyperhidrosis
- Intense pulsed light treatments for rosacea
- Medical advice for obesity
- Reconstructive treatments aimed at reducing scarring following burns, knife attacks or breast augmentation, and rebuilding the lips post chemotherapy
For any practitioner who is looking to exempt some or all their services, it is worth ensuring that records are kept of patients that have been rejected, such as those turned down on the basis that treatment would worsen their health rather than improve it. The reason being that rejecting a patient who has dysmorphia and does not require further cosmetic treatment would be an example of the decision-making process of a medical practitioner determining the requirement for treatment, whereas a beautician might happily treat the patient.
VAT Registration Threshold
Practitioners often believe that all their turnover counts towards the VAT registration threshold, and being VAT-registered creates a major problem for them. In fact, exempt supplies do not count toward the VAT registration threshold, but it is based solely on VATable income. Registration is compulsory if VATable income is equal to or greater than £85,000 per rolling 12 months. It is possible to register for VAT on a voluntary basis before reaching the VAT registration threshold.
Being VAT-registered can be beneficial as it allows VAT recovery on purchases used by the business to make VATable supplies, reducing the cost by one-sixth. If a business makes exempt supplies it is likely to be able to recover VAT on some or all of its costs.
Once VAT-registered, the practitioner needs to consider how their services are priced. The options are to either:
- Add 20% VAT onto the price charged for any procedures that are not VAT-exempt
- Deduct one-fifth of the income from VATable procedures and pay to HMRC. Practitioners can also consider using the VAT Flat Rate Scheme as an easy method of accounting for VAT.
However, this may not be desirable or allowable if the practitioner:
- Makes exempt supplies, as they would need to account for the flat rate VAT percentage on exempt income
- Is associated with another business, which would then prohibit the use of the VAT Flat Rate Scheme
- Purchases very little by way of goods, as they may be classed as a limited cost business and required to account for VAT at a flat rate of 16.5%, but will be unable to recover VAT on costs the business incurs.
As with any form of taxation, it is worth practitioners taking advice from their usual accountant or VAT advisor to determine if supplies that they make qualify for exemption or not, and if VAT registration would be a benefit or a cost to the business.
This is a complex issue that is very much an ongoing one, with future disputes and court cases highly likely. Many practitioners feel aggrieved that HMRC is taking an unreasonably restrictive view of their medical speciality, and the very simple fact that there is a clinician/patient relationship should be adequate for the services to be determined as medical care. HMRC has dismissed this argument; however, it has not yet been fully tried in court and further changes are possible. Until further clarity is forthcoming, it is recommended that practitioners are fully prepared to defend their diagnosis and proposed treatment to be able to continue to avail themselves of VAT exemption.
You can read other articles from the Journal of Aesthetic Nursing online here.
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