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. However, a number of European decisions make it clear that exemption was only for those services of medical professionals which have the principal purpose of diagnosis or 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, among other staff. 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 was to protect, restore or maintain the health of the patient. 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 patients often pay a lump sum for a 'package' of services to include consultations plus surgery and after-care, so there could be real difficulty for both private hospitals and self-employed registered 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 and summarises the applicable law. 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 such as aesthetics clinics or private hospitals will 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 certain treatments may now be vulnerable to an investigation by HMRC.
If HMRC concludes that VAT should have been charged, the consequences for the medical professional or business could be truly dire. HMRC is entitled to look back at several years' tax returns. The cumulative effect could be crippling assessments for underpaid tax plus interest and penalties.
The upshot of the SRL case is that all registered medical professionals (and similarly private clinics or 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.
Will VAT disputes be easy to win?
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 private hospital wishes to argue that the primary purpose of the treatment was medical, they will have the burden of providing evidence.
For medical professionals, this will be complicated. The strict rules of patient confidentiality and the data protection laws would prevent the medical professional from simply providing HMRC with copies of medical evidence relating to particular patients. Specialist advice would be needed to enable the medical professional or business to make their best tax arguments without creating serious professional conduct and data protection problems.
But there are other practical difficulties. In order to prove that the treatment is primarily to address a health problem, medical evidence would be needed from someone other than the aesthetic practitioner. For example, a clinical psychiatrist if the patient had a mental health problem related to appearance. Obtaining retrospective medical evidence may simply be impossible if it was not obtained at the time of the treatment. Even for new patients, obtaining that evidence could be time-consuming, and potentially disproportionately expensive for the patient. In many cases it would likely be simpler and cheaper to simply charge the patient VAT, even if the medical professional thought that the treatment was not primarily cosmetic.
In other cases, the relevant evidence might only be available after treatment. For example, a dermatology patient may want an apparently-benign mole removed for cosmetic reasons, such that VAT should be added to the fee. But if tissue testing later shows that the mole was malignant, then with hindsight the treatment was medically necessary. The SRL case gives no guidance about what would happen in relation to VAT in that situation.
In short, any VAT disputes arising out of healthcare services are likely to be highly complex, costly (upwards of £100,000 to prepare a case for Tribunal) and time-consuming. They would be unlikely to be either quick or easy to resolve, and the stakes could be very high for the medical professional or business involved.
What can medical professionals, clinics and hospitals do to protect themselves?
The SRL case arose out of Botox treatment. However, it remains to be seen how many other medical disciplines could be affected by the decision. Dermatologists could be affected as mentioned above. Also, where eyes are treated simply so that an otherwise-healthy patient can dispense with glasses, it could be arguable that the treatment is not eligible for VAT-exemption. Similarly, vascular surgeons might be affected where they treat unsightly varicose veins that are not otherwise medically troublesome. Even Ear, Nose and Throat specialists could be vulnerable if they provide so-called 'voice lift' procedures on healthy patients who simply wish to sound less old.
A medical professional or business would certainly need to take expert tax advice as soon as possible if they are concerned that i) any part of their past or present services might not be VAT-exempt and ii) who have not been charging their patients or customers VAT on those services. This is not an issue that can be ignored, and taking specialist advice pro-actively can certainly help to minimise any potential problems.
Those who decide to take advice will need to ensure that their advisers have the necessary specialist expertise. These are not simply questions of tax law, but also require a deep understanding of the healthcare sector and the details of specialist medical procedures. Happily DWF Law LLP has precisely these areas of expertise, and therefore should be well placed to audit your specific practice and advise on the best ways forward.
Also, it would be worthwhile for medical professionals and business to check whether they have commercial legal expenses insurance for their practice, and whether that insurance would cover the legal costs of having a tax dispute with HMRC. While those types of insurance would not pay any tax charges, interest or penalties, they could help with the cost of specialist legal representation if a dispute with HMRC does arise. The nature of commercial legal expenses policies means that the insureds often have a very large say in which lawyers are appointed to represent them. Insureds will need to be ready to insist on representation by a firm with expertise in both tax and the healthcare sector, such as DWF Law LLP.