What has VAT got to do with healthcare?
The supply of goods and services in the UK is subject to Value Added Tax ("VAT"), currently at up to 20%. Categories of medical care have always been exempt. A number of European decisions make it clear that the exemption was only for those services of medical professionals which have the principal purpose of diagnosis and treatment of diseases and health disorders.
There is therefore a significant grey area for medical professionals, particularly those carrying out aesthetic or cosmetic treatments. There could be legitimate scope for disagreement over whether a particular treatment is purely cosmetic or a 'medical' treatment in the sense required by the case-law.
What did the Judge decide in Skin Rich?
On 6 August 2019 Judge Zaman of the First Tier Tribunal (Tax Chamber) handed down her decision in Skin Rich Ltd v The Commissioners for Her Majesty's Revenue and Customs.
Skin Rich Ltd ("SRL") operates a skin and aesthetics clinic, with treatments including Botox and fillers. It had employed registered medical professionals (including doctors, nurses and a dentist) to administer treatments. SRL had not been charging its customers VAT on its Botox treatments. HMRC investigated when it saw the discrepancy between SRL's VAT-return and corporation tax return. SRL argued that those treatments were exempt from VAT. HMRC concluded that Botox treatments could not be exempt as HMRC did not consider them to be "medical" treatments. SRL appealed, leading to the decision of Judge Zaman.
The Judge summarised the state of the law extensively. She heard witness evidence to the effect that Botox can be used to treat medical conditions. However, the Judge noted that no evidence was submitted that any of SRL's actual patients received Botox to treat any such medical conditions.
Therefore, SRL did not satisfy the Judge that the purpose of the Botox and other injectables was to protect, restore or maintain the health of the patients. In effect, the Judge concluded that the treatments were primarily for cosmetic reasons. Therefore they were not exempt from VAT.
What about treatments provided in hospital?
The SRL treatments were carried out in an unregulated high street clinic, rather than a hospital or regulated clinic. But are treatments automatically exempt from VAT if they are carried out in a hospital?
The Judge made observations in passing. She noted that the principal European VAT directive seems to envisage that treatment within a hospital would always be exempt from VAT. However, the Judge commented that the treatment still has to fulfil the test of being "medical or surgical treatment" even if it is carried out within a hospital. Therefore, the SRL judgment highlights that there is even a potential grey area in relation to the VAT-exemption of treatments taking place in a hospital or other regulated clinic.
And what about the fees for pre- and post-surgery consultations that take place outside of a hospital? At present cosmetic patients often pay a lump sum for a 'package' of services to include consultations plus surgery and after-care, so there could be difficulty for both private hospitals and self-employed individual medical professionals, if it transpires that some parts of the lump-sum fee are VAT-exempt and others are not.
Why is Skin Rich important?
The decision is a rare example of a fully-reasoned judgment over whether a particular treatment is exempt from VAT. Therefore, it will help medical professionals and private hospitals (and their tax advisers) re-assess their practices and help them or their advisers verify that they are complying with the VAT rules.
It is also a reminder and a warning that the VAT rules are complicated and fact-specific. It highlights that HMRC is very interested in pro-actively investigating VAT as it relates to the healthcare sector. Even if they have not yet investigated a particular individual or business, it is increasingly likely that they will do so.
Unfortunately, it does seem likely that many registered medical professionals and businesses will, like SRL, find that they have long been inadvertently breaching the rules about when to charge VAT to patients or customers. Any medical professionals or businesses which have not been adding VAT to their fees for cosmetic treatments may now be vulnerable to an investigation by HMRC, and may ultimately be required to pay the VAT themselves and possibly also penalties.
The upshot of the SRL case is that all registered medical professionals (and similarly private hospitals) who provide treatments that are arguably 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.
What does this mean for medical indemnity insurers?
The aesthetics sector has been booming, so many medical indemnity insurers will have insureds who do at least some cosmetic and aesthetic work.
Many of those insureds may now be advised to charge VAT on the fees to be paid by patients, and some will become VAT-registered for the first time. This would be good news for medical indemnity insurers. When claims arise that require the appointment of defence lawyers, the joint retainer by the insurer and the insured means that the VAT portion of the defence lawyers' fees can be charged direct to the Insured. The Insured can recover some of the VAT through their quarterly VAT returns, so there is less ultimate cost to the Insured (although there would be an impact on the Insured's cash flow).
This means that in some cases the insurers will save up to 20% on the usual defence costs spend for defending a clinical negligence claim, regardless of whether the claim arose from a cosmetic or medical procedure. In substantial cases this could represent a large saving for insurers. Insurers should ensure that their panels of defence lawyers proactively check on each instruction whether the Insured is VAT-registered (as DWF Law LLP does), to avoid the risk of insurers unnecessarily paying the VAT portion of the defence fees.
What does this mean for commercial legal expenses insurers?
Many individual self-employed registered medical professionals (nurses, doctors and dentists), and some companies providing cosmetic or aesthetic services, will hold commercial legal expenses insurance. Some of these policies will be bundled in with personal policies such as house insurance, some will be sold alongside medical indemnity insurance. Many of those policies will provide cover for the legal fees and costs of representing the Insured in a tax dispute with HMRC.
The Skin Rich decision likely indicates that many more individuals and businesses in the aesthetic healthcare sector will be investigated by HMRC, and will likely get drawn into a dispute with HMRC over whether VAT should have been paid. As a result, commercial legal expenses insurers should expect an increase in the numbers of requests for indemnity for the costs of an HMRC dispute.
Commercial legal expenses insurers should also anticipate that these disputes will be legally complex, and therefore expensive for the insured to dispute. This is because the SRL decision indicates that the question of whether a treatment is exempt from VAT needs to be considered on a case-by-case basis for each individual patient. If the medical professional or business wishes to argue that the primary purpose of the treatment was medical, they will have the burden of providing evidence. Since evidence would probably be needed for each treatment, the costs involved in collating and disclosing documentary evidence alone could be significant. Also, the strict rules of patient confidentiality and data protection laws would prevent the medical professional from simply providing HMRC with copies of that medical evidence. So additional legal costs would no doubt be incurred dealing with that difficulty.
The nature of commercial legal expenses insurance means that the insurers do not necessarily have the final say on which lawyer is retained to represent the insured in a tax dispute with HMRC. However, insurers will need to emphasise to their insureds the importance of ensuring that their chosen lawyer has significant expertise not only in tax disputes, but also in the healthcare sector. Insurers will need to be ready to strongly recommend suitable lawyers to their insureds at short notice. Therefore commercial legal expenses insurers should be prepared by having ready a list of legal business with the right expertise to work on complex tax disputes arising out of the healthcare sector, such as DWF Law LLP.