VAT advisor Veronica Donnelly explains when and how your aesthetic treatments may not liable for tax payment
As most of you know, medical treatments and health services are exempt from VAT, meaning those offering them do not have to pay tax on their supply.1 There is, however, often confusion over whether aesthetic treatments can be considered medical and are thus exempt from tax. The most common misconception I come across in my work is that there is some magical trick to making aesthetic supplies exempt from VAT, which involves a form of VAT planning. There is no magic, nor is there VAT planning; just a simple test against the services you already deliver to establish what you are actually doing on a day-to-day basis and whether your services are exempt from VAT.
The test comprises two parts, detailed below, both of which need to be met. If you fail one or both then the treatment is considered cosmetic for VAT purposes and subject to VAT.
If your cosmetic turnover, along with any other taxable supplies, exceeds the VAT registration threshold in any 12-month rolling period, then you are required to register for VAT and pay tax on those sales. Taxable supplies could include sales of products (separately from treatments) or provision of training. The current VAT registration threshold is £85,000, although it is worth noting this has been less in previous years.2
Law states that for the VAT exemption to apply there needs to be:3
So, if you are a doctor, surgeon, dentist, nurse or other practitioner on a medical register you pass the first part of the test, provided you are working within your training, qualifications and experience. The second test gives more food for thought. No one is going to challenge that surgery in a hospital theatre, for example, is a medical procedure, but that is not the relevant question for VAT.
It is not enough for a treatment to be medical; for VAT purposes, the treatment must be given for a medical purpose.4
HMRC’s guidance on what is exempt comes from two cases; Dr Peter d’Ambrumenil and Dispute Resolution Services (DRS) Ltd (D’Ambrumenil), and Future Health Technologies.4 Dr d’Ambrumenil was a qualified doctor who offered medical and legal support through his company DRS. The case considered whether services of medical examinations for insurance companies and medical certificates, as well as all services carried out by a person on a medical register, would fall within the exemption. The court concluded that, ‘The medical services affected for a purpose other than that of protecting, including maintaining or restoring; human health may not, according to the court’s case-law, benefit from the exemption’.4
Future Health Technologies is a European Court of Justice (ECJ) case which dealt with the extraction of stem cells that were frozen for possible future use.5 The decision stated that to be medical, a treatment had to comprise, ‘Services which had as their purpose the diagnosis, treatment and, in so far as possible, cure of diseases or health disorders’. It went on to say medical services, ‘Effected for the purpose of protecting, including maintaining or restoring, human health could benefit from the exemption’.
This was in the context that at the time the stem cells were extracted for freezing, there was no medical purpose for the procedure. In the court’s view, the medical purpose arose at a later date when the cells were thawed for use in treatment and so were exempt at that time, but not before.
The Skatteverket v PFC Clinics (PFC) ECJ case in 2012 is an aesthetic hospital case which went to the European Court of Justice to clarify whether:
This case answered ‘no’ to the first question and in relation to the second question, expanded the medical definition by saying, ‘To be a medical assessment, it must be based on findings of a medical nature which are made by a person qualified for that purpose’ and, ‘The subjective understanding that the person who undergoes plastic surgery or a cosmetic treatment has of it, is not in itself decisive in order to determine whether that intervention has a therapeutic purpose’. The case also made clear that, ‘It follows from the case-law that the health problems covered by exempt transactions may be psychological’,6 which I discuss in more detail below.
Both the Future Health Technologies and PFC cases clearly stated that where a treatment is carried out for purely cosmetic reasons, that treatment cannot be for medical purposes and so cannot be exempt from VAT.
Where confusion can arise is that whilst the two ECJ cases described exclude only purely cosmetic treatments from the exemption, HM Revenue and Customs is applying VAT decisions relating to mixed supplies i.e. supplies with different components which have VAT liabilities. As an example, consider the case where biscuits (which are zerorated) were sold in a decorative tin (which are standard rated). It had to be determined whether the customer was actually buying the biscuits or the tin in order to arrive at the VAT liability. The test is ultimately one of the predominant or main supply.7 HMRC is applying those decisions and assessing the VAT liability on the primary purpose of the treatment, rather than only excluding the purely cosmetic supplies and treating everything else as medical.
The recent Skin Rich (SRL) tribunal case was the first UK VAT tribunal specifically involving an aesthetic business, which analysed whether the primary purpose of treatment was medical or not.8 It was decided on this basis when the tribunal chairman stated, “We recognise that where the primary purpose of a client seeking treatment is for these reasons then, in line with the decision in Skatteverket, this may be medical care. However, the evidence did not support this being the primary purpose for which treatment was sought from SRL.”
This statement is particularly interesting because whilst it recognises that there can be medical care, it pushes the purpose back on the patient rather than the practitioner, which is likely to be challenged in the courts going forward as being contrary to the PFC clinic decision.
So, basically, no magic. If exemption is to apply then there must be a clear diagnosis of a physiological or psychological condition by a person on a medical register acting within their training, qualifications and experience, undertaking a treatment plan for the primary purpose of protecting, maintaining or restoring the health of that patient. Where Skinrich appeared to fail was through not producing sufficient evidence of the primary purpose in court.
It is no surprise that when HMRC carries out reviews of aesthetic businesses, they are asking for copies of consultation notes to confirm that there has been a diagnosis by a suitably qualified person and that the primary purpose of the treatment plan is to treat that condition and not just deliver cosmetic results.
My advice is that you should therefore provide details of the registration numbers and qualifications for your medical staff, even if HMRC has not asked for these yet. These take care of test one. You should also provide an agreed sample of your medical notes. These must be redacted. Your patients are covered by medical confidentiality so HMRC is not entitled to go through your patient records.
The HMRC officer must give you a period for which they can ask to see all records, which must be a reasonable number,9 and you should ensure all personal details of the patient are removed.
It is important to recognise that HMRC officers are not qualified in medicine. You should therefore always either translate or explain medical terms and give a history of why the treatment was being given, if it is not clear from the notes. While most patient records will now be paperless, HMRC can look at records from the commencement of the business, which may not have been paperless, so consider that if your handwriting is not legible to anyone other than yourself, then you may want to type a note of your diagnosis and treatment plan to attach to each note. These notes are the basis on which HMRC will decide the VAT liability, so you need to give them as much information as you can to assist them in understanding what you do and why.
In particular, HMRC is focusing on any psychological diagnosis. This can be problematic as HMRC frequently confuses psychiatric and psychological so, again, clarity is key in explaining all of the facts around the diagnosis and the reason for the treatment plan. Ideally your notes should be sufficiently detailed so that if another medical professional were to read them without having met the patient, they could arrive at the same conclusion. For example it is not enough to write ‘patient wants to look younger’; it is more relevant to say why the patient wants to look younger and why in your opinion this is presenting as a psychological condition which you can treat. Is the patient undergoing a particularly stressful episode in their lives resulting in loss of confidence and/or emotional distress? Every patient is individual and every diagnosis is personal. If your notes do not contain all of that information, because you didn’t know you had to write it down, but you know the patient well enough to remember the facts that led you to the diagnosis, you should either make a note now to attach to the patient file or be prepared to explain it to the HMRC officer carrying out the review.
As far as HMRC is concerned, exemption is a relief from VAT and so all supplies are subject to VAT unless you can prove the relief applies. The onus is on the taxpayer to prove that they meet the test for exemption.
In my experience, aesthetic practitioners are usually very clear about why they treat patients, but have little understanding of the evidence HMRC requires to be satisfied as to the VAT liability. As such, both proceed to talk in different languages using jargon the other will not understand. Providing the officer approaches the business with an open mind and listens to the explanations being supplied, while the practitioner takes the time to make full explanations, then it is more likely that the correct answer will be reached. No fairy dust required, just a clear understanding of the purpose of the treatments and the evidence to explain it to HMRC.