VAT Exemption Status – Are Your Clients Exempt?

Author

Keith Miller

Keith is an experienced VAT adviser who has been advising businesses for almost 30 years.

Keith’s VAT corner – Is Your Client’s VAT Exemption Correct?

Key Points

  • The Skin Rich case shows us the danger of blindly following industry practice
  • Adhere to, and keep your own evidence of adherence to, applicable conditions
  • Not just applicable to health sector – financial services businesses are also of interest to HMRC

Introduction

The UK cosmetic procedure market reportedly turns over almost £4bn a year.  In this highly competitive market, many practitioners have long assumed that procedures such as Botox and fillers are VAT exempt.

Skin Rich – Exemption & VAT Status

However, we wrote last September about the Skin Rich VAT case, which has created anxiety across the cosmetic procedure sector.

The case highlighted the dangers that may arise if VAT exemption is applied too casually, particularly when exemption relies not only on a number of conditions being met, but also the ability to evidence that these conditions have been met.

The case did not question whether Botox and fillers are potentially eligible for VAT exemption, it confirmed that they are.  However, it focused on the important point that VAT exemption should only apply if such treatments were provided principally for medical purposes (“the protection, including the maintenance or restoration of health”).

Although there are strong arguments that the taxpayer is in the best position to make this decision, the VAT Tribunal pointed out that the person making that decision should nonetheless be qualified to make such a decision.

VAT exemption will therefore rely on the practitioner being able to demonstrate that, on a case by case basis, treatments were provided for medical purposes and that a suitably qualified person made that decision.

VAT Advice & Industry Practice

This case appears to be a typical example of a taxpayer perhaps following ‘industry practice’ and assuming that a particular VAT treatment applies without introducing procedures to support the VAT treatment.

Although HMRC don’t appear to have provided any specific guidance on how a practitioner can demonstrate that a procedure is carried out principally for medical reasons, it would appear that a starting point would be to carefully document each consultation, a process that should involve a suitably qualified practitioner.

What does this mean?

Similar businesses are now faced with the prospect of HMRC challenging the VAT exemption of their treatments unless they can provide the necessary evidence.

The problem being that such evidence is much more difficult to produce retrospectively, so if the taxpayer is not VAT registered, HMRC could potentially seek VAT arrears back to whenever the business should have become VAT registered.

VAT exemptions and other VAT reliefs are often drafted to be narrowly applied, and HMRC are keen to ensure the scope for exemption is not widened beyond its intended limits.  Exemptions and reliefs are, after all, an exception to the normal rules, so should not be taken for granted.

This case, and its potential aftermath, should be a warning to taxpayers that following ‘industry practice’ is not enough to support VAT exemption.  There are always conditions attached, and to is essential that these are adhered to and evidenced.

A final warning is that it isn’t only HMRC that can turn the screw.  Potential VAT exposures also tend to rear their head when businesses are bought and sold and when businesses are seeking financial support or investment.

Conclusion

If you are applying VAT exemptions or other VAT reliefs, you should be fully prepared to support that treatment. HMRC, potential buyers, investors and financiers will not be interested that other businesses in the sector are also applying similar reliefs. They will only be interested in whether you can support yours.

Such issues arise not only in the health and welfare sectors but any sector where VAT exemption applies.  For example, financial services providers, particularly providers of intermediary services, are of particular interest to HMRC.

Be prepared.

We have significant experience in assisting clients develop effective VAT processes to support VAT exemption and other reliefs. Contact a member of our helpful team or read more about VAT and HMRC below…

KEITH MILLER

 

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