Here in the UK the supply of goods and services is subject to VAT, with medical care always having been exempt, where people are treated by medical professionals. But what constitutes medical care?
There would currently appear to be disputes over whether aesthetic treatments are purely cosmetic (and as such would be subject to a charge of 20%, the standard rate of VAT), or are a VAT free ‘medical’ treatment and this has recently been commented upon and factors decided in case-law.
Over recent years with the widespread prevalence of aesthetic or cosmetic treatments being seen in salons, homes and clinics everywhere, a grey area has arisen and is being flagged up by HMRC for investigation, for those whose turnover exceeds the VAT threshold of £85,000.
So what is the ‘black and white of it’ in HMRC’s eyes and what is the ‘grey area’ to be explored?
In August 2019 the case of Skin Rich Ltd v The Commissioners for Her Majesty’s Revenue and Customs added weight to HMRC’s views but also gave rise to questions.
Skin Rich Ltd was a skin and aesthetics clinic, employing registered medical professionals including both doctors and nurses, treating clients with a variety of procedures comprising amongst others the injection of Botox and fillers. No VAT had been charged across all their procedures.
How would HMRC have selected this case for enquiry?
HMRC screen business accounts when submitted to them and select many on the basis of:-
• Turnover falling just below the VAT threshold of £85,000
• Turnover not matching their VAT returns, if filed
• Nature of the trade, in various specialist projects into whole UK or regional trade sectors – often called ‘campaigns’, such as one into cosmetic practices across the UK.
• Information received from anonymous sources like your competitors, an online or social media presence, articles in the papers or other press, planning applications for change of use or new premises, information gathered from your landlords, national minimum wage concerns into salons, Status enquiries emanating from payments made to self- employed ( off payroll ) individuals ( often ‘renting’ a chair), large or exceptional claims made in the profit and loss account or low drawings or directors remuneration ( which could indicate off-record, diverted cash being received).
So once they have a foot in the door they can now rely on the outcome of the above case where HMRC originally concluded that Botox treatments could not be exempt from VAT as they did not consider them to be “medical” treatment – and on appeal, the judge made her decision which hung on the lack evidence that any of the firm’s actual patients received cosmetic procedures to treat any ‘diagnosed’ medical conditions.
She concluded that the treatments were primarily for cosmetic reasons. Therefore, they were not exempt from VAT.
Sadly, many aesthetics clinics even when operated entirely by a qualified medial practitioner, may well find that they have been breaching the rules about charging VAT to their clients, either knowingly or not.
It has however been a well-known issue over recent years and this has spread by word of mouth (albeit largely ignored) across this industry. Most practitioners are aware of this hot potato!
So, if you are in the frame for such a Revenue attack what can you do to avoid a catastrophe or limit the damage?
HMRC are entitled to look back several years and can go back 20 years. HMRC normally go back 4 years for VAT. Either way that can amount to ruin for most businesses.
Mitigation can arise in several ways.
All registered medical professionals who provide treatments that are done primarily for cosmetic or aesthetic purposes, need to review their practices. Those who find that their VAT-taxable annual turnover is over £85,000 would have to become VAT registered, with all that this entails. Others can take steps to document well the medical issues arising.
Deals can be done to reclaim input VAT retrospectively on anything paid out, subject to production of VAT invoices.
Robust records are needed. These must not be written up or produced or altered after the event.
PRO-ACTIVE ACTION IS NEEDED NOW
To pre-empt and to stand a chance of winning the case, firms need to demonstrate on a case by case basis, exactly what it is they are providing and that the primary purpose of any treatment is medical. This is made more difficult when patient records are private, confidential and data protection has also to be considered.
As always in tax, the burden of proof is on you the appellant
Do you need third party medical corroboration or an expert witness?
Just because the person performing the treatment is medically qualified, this is not alone sufficient proof that the treatment is for a medical purpose for VAT or tax purposes.
The salient point is not whether the medical treatment being performed is done by a medical person, it is whether the procedure is primarily for a medical purpose ie. WHY it is being carried out?
Excellent robust daily records as evidence to substantiate your claims is needed, not only covering your training and skills but also of your consultation process, diagnosis and reasons for doing each treatment, on an individual case-by-case basis – this is 100% necessary. You will then at least have a good chance of defending any costly HMRC intervention.
The consultation process, as with any other medical consultation, should seek to interview the patient to establish their motivation for seeking treatment and expose any valid psychological needs or the need to alleviate physical symptoms. Diagnose medically and record the reason why such therapeutic services will benefit them and such an approach noted in the records will serve you well. Any treatments denied, amended or alternatives offered should be noted too
This can serve to limit the number of years involved, from VAT being due back to ‘day one’ at the worst, to at best no earlier years being included in a settlement and nothing becoming due – leaving only any relevant changes going forward.
HMRC will always profess and present themselves as “masters of all trades” and in fact may have little experience individually, but you are the expert and with complete, reliable and adequate records and a good adviser as back-up, you will present the best possible face to the authorities.