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.
Then 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. 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.
The consequences of this decision for medical professionals, clinics and hospitals is discussed in more detail in our article "VAT's not looking good for aesthetics…" which can be found here.
In summary, 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.
Could there be consequences for Tax Professionals?
Skin Rich will likely have significant consequences for tax advisers both immediately and further down the line.
It is likely that many healthcare professionals and business will want advice in the near future about VAT, so there will be an immediate need to ensure that professionals are up to date on Skin Rich and understand both the technical and practical issues that it raises. Needless to say, no reasonable tax professional should be advising a medical business in the aesthetics sector without reference to that case and the European cases it cites.
In due course, it is inevitable that some medical professionals and business will be found by HMRC to owe unpaid VAT, and also interest and penalties. In those situations professional negligence claims may follow against the relevant tax professionals. After all, the Skin Rich decision does not make any new law, and it is not based on a particularly unusual set of facts. Indeed, the decision seems to reflect HMRC's view as set out in 2007 in VAT Notice 701/57 Health Professionals which stated that HMRC "generally accept that cosmetic services are exempt if they are undertaken as an element of a health care treatment programme. Where services are undertaken purely for cosmetic reasons, they will be standard rated."
As a result, medical professionals who are found to owe VAT may consider they had a reasonable prima facie argument that they could and should have been advised to charge VAT on cosmetic procedures many years ago.
However, these cases will likely be highly fact-sensitive, and there could be a range of good defences available. For example, 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. As a result, a reasonable body of tax professionals might also have considered the treatment should be VAT-exempt, unless and until such time as HMRC makes a finding to the contrary. Consideration should also be given to the nature and extent of the tax adviser's engagement with the medical professional: was there a duty to advise on whether VAT should have been charged?
Unfortunately, it seems that tax advisers with clients in the cosmetic/aesthetic sector may face a possible influx of VAT-related claims. They should consider whether in light of Skin Rich they should advise clients to change their approach to VAT, and also consider reviewing their previous advices to help in understanding any potential exposure, and whether there are any steps they should take to protect their interests. Similarly, their professional indemnity insurers and brokers need to be ready.
Both groups will need to ensure that their advisers and/or panel defence lawyers have, like DWF Law LLP, the expertise to deal with the professional negligence, healthcare and tax complexities that such cases will involve.