The VAT debate
Following a recent VAT tribunal involving an aesthetic clinic, we re-examine the issue of VAT in aesthetics
The aesthetics industry hit the national headlines again this summer, this time over the issue of VAT on procedures. With headlines reading, “Botox is not a medical procedure so VAT will have to be added” a wave of panic and confusion swept across the sector. Tax experts have been warning aesthetic clinics that HMRC is cracking down on VAT on procedures deemed to be ‘purely cosmetic’ for a number of years now, but the recent tribunal brought the issue firmly back into the spotlight.
The case in question involved a VAT tribunal in June, 2019, against the Skin Rich clinic in Richmond, London. The question posed was whether botulinum toxin and other injectable treatments were exempt from VAT. The tribunal ruled that, in this case, the primary purpose of the treatments was not “protecting, restoring or maintaining health and thus not medical care”. They were therefore not exempt from VAT.
Veronica Donnelly, a tax expert at Campbell Dallas, explains, “The headlines don’t actually give the true story. It’s not as bad as it looks but, that being said, these assessments have the potential to put people out of business and so there is a panic across the industry. The test for medical exemption in relation to VAT remains the same; the supply must be made by a person on a medical register, or someone supervised by that person, and the treatment must be one of medical care. The appropriate records must be kept to evidence these treatments and their purpose, and it is on this evidence that HMRC will rely.”
The court agreed that just because a treatment has a cosmetic benefit, this does not preclude it from also having the principal purpose of protecting, maintaining or restoring health and therefore being VAT exempt. However, it went on to say that, in this case, “we do not find that this principal purpose has been established”.
This was because, it said, some of the treatments performed at the clinic were not diagnosed by a medical professional and for those that were, it was not satisfied that the evidence produced was sufficient to prove a medical purpose for the treatments.
“This case turned on its own facts largely in that the evidence they produced wasn’t sufficient and that was the bottom line,” Donnelly says.
VAT: WHAT IS THE LAW AS IT CURRENTLY STANDS?
Over the threshold
The current UK threshold for VAT registration is £85,000. If your taxable turnover is more than £85,000 you will need to be VAT registered. If your total turnover is under £85,000 you are not required to be registered for VAT and HMRC can’t assess you. However, as Donnelly explains, “If there is a mixture of medical and cosmetic treatments in your business, the £85,000 only applies to the cosmetic element. So you could have £1 million turnover but not be required to be registered because the cosmetic treatments within that million are not over the £85,000 threshold. As a starting point, HMRC will always look at your total turnover so if you are near or above £85,000 you should have your records up to scratch. It will look at total turnover and then say ‘now prove to us that the taxable element of it is under £85,000’. However, until it establishes that there is a requirement to register for VAT, it is not entitled to see your records.”
‘Purely cosmetic’ or ‘for a medical purpose’
VAT law allows for the exemption from charging VAT for a service if there is a medical purpose to that service AND where such a service is delivered by a healthcare professional. This includes doctors, dentists and nurses. Where the purpose is ‘purely cosmetic’ then VAT would be chargeable at the standard prevailing rate, which is currently 20%.
Importantly, VAT is a European Tax and HMRC in the UK does not have the final say in how VAT law should be interpreted. HMRC’s focus on the patient perspective was successfully challenged in a landmark ruling by the Court of Justice of the European Union.
Dr John Curran, a founder member of the British College of Aesthetic Medicine (BCAM), has been working on providing clarity on this issue on behalf of BCAM members for the past 11 years. In speaking to us, he stresses that BCAM cannot lawfully give tax advice and advised those with genuine concerns to seek independent professional opinion and guidance. He says, “Even if the practitioner’s business is registered for VAT, each patient/treatment should be assessed on a case-by-case basis (as being exempt or non-exempt using the ‘purely cosmetic’ criteria).
“The European Court of Justice (ECJ) has interpreted ‘medical’ for the purposes of this law to include psychological and psychosocial reasons as well as preventative healthcare. The ECJ considered, in determining purpose, that it was the clinician who decided if the interaction with the patient had a medical purpose or was ‘purely cosmetic’.”
As aesthetics by nature has a cosmetic element to it the line has often been blurred as to the medical nature of certain treatments, despite most of the procedures being provided by doctors, nurses and dentists. For example, performing laser hair removal on a bikini line because the client doesn’t want to shave or wax is different from removing facial hair caused by hirsutism or polycystic ovaries, or where someone has a psychological problem because of excessive hair growth.
Dr Curran says, “In [our interactions] with HMRC we were able to establish that a wide range of cosmetic dermatology treatments may have a medical element to the purpose, including the more common procedures such as botulinum toxin injections, IPL and the use of dermal fillers. However, HMRC has stated that it would need to see some evidence of a medical element to a treatment. Such evidence would be in the form of good medical records, including consent and setting out a medical purpose. This purpose may be one where a cosmetic procedure is undertaken to help with a patient’s underlying anxiety regarding a specific feature.
“It is my strongly held opinion, having read ‘Good Medical Practice’ (GMC), that it is unethical for a doctor to treat a patient for purely cosmetic reasons without giving regard to protecting the health of the patient. To do so would be to put the health of the patient at risk without any health gain, something I believe our professional body would view negatively.
“Every time a doctor takes on a doctor/patient relationship they are practising medicine. Therefore, in all the things you do, you have to behave like a doctor. You must write notes. You must consent. You must have a duty of care. You must maintain patient confidentiality. You must take responsibility if it goes wrong. You must tell the patient about their options. You must have a purpose for doing something, write down why you are doing it and be able to explain that to a group of your peers. If you have no medical reason for doing something, you should tot up your £85,000 and charge your patient the VAT. You need to honest about it and say ‘there is no medical reason for me to do this’.”
But Donnelly stresses that just because the person performing the treatment is medically qualified, this is not enough proof that the treatment is for a medical purpose in tax law. She says, “It’s not just the case that if you are a doctor, you are always providing medical care. That may be the case in medicine, but it’s not the case in tax. Under medical ethics there are certain things doctors can and can’t do but in tax case law being on a medical register does not stop you from doing something that is not for a medical purpose. The test is not whether it’s medical treatment being performed by a medical person, it’s whether it’s for a medical purpose. So it’s not what I’m doing, it’s why I’m doing it.
“Practitioners must not view this as a tax planning scam and start shoehorning everything they do under the ‘medical purpose’ banner to avoid paying VAT. It’s about seriously considering the purpose of the treatment they’re doing, what they are doing and then writing it down. If anybody tells me they are 100% medical and therefore completely exempt, they will get some degree of cynicism from me never mind HMRC.”
A note on item 4
Another factor that came into play during the recent tribunal was the issue of state-regulated clinics or hospitals (CQC-registered clinics or HIS-registered clinics in Scotland). Donnelly says, “Up until now the test has been articles 1 and 2 of the VAT Act where we talked about the provision of medical care by a professional. What this case did was start to address the question of item 4, which talks about provision of care by a state-regulated clinic or hospital, and that is particularly interesting. The case specifically said that had this type of registration been in place HMRC would have accepted the treatments as being the provision of care. You’ve still got to demonstrate the medical care, but it’s a softer test and again it comes down to the quality of the records.”
Evidence and good record keeping
Both Donnelly and Dr Curran agree that providing evidence not only of your training and expertise but also of your consultation process, diagnosis and reasons for doing each treatment on a case-by-case basis is absolutely key. If HMRC does investigate you it will all be about the evidence and your records could be your saving grace or downfall.
Dr Curran says, “I know of six clinics or individuals currently dealing with an approach by HMRC regarding medical VAT. As they approach tribunal stage it is likely an expert will be appointed to review notes to determine if there is a medical basis for treatment. This is where the case will stand or fall apart. I cannot state too strongly the importance of good medical record taking and, in particular, thinking hard about the purpose and highlighting the medical/psychological benefit of treatment.
“The consultation process [should be] at the standard of any other medical consultation, carefully establishing why the patient is seeking treatment, the psychological impact of the presenting concerns and associated physical symptoms, and stating a therapeutic purpose for intervention. Such an approach will benefit patient and clinician alike.”
Donnelly adds, “The sector needs to stop burying its head in the sand and start addressing its record keeping. You have got to be able to demonstrate your medical qualifications and the fact you’re providing medical care. Your records need to show this and need to be detailed enough to stand up to scrutiny. Our advice continues to be for businesses to look very carefully at their record keeping and evidence of medical purpose. There are no shortcuts. Where you can clearly evidence a medical purpose then VAT is exempt. If not, it’s cosmetic.”
You can read the tribunal ruling by visiting financeandtax.decisions.tribunals.gov.uk/judgmentfiles/j11271/TC07310.pdf
