Value Added Tax is a levy applied to most products and services. It is a complex tax, but for many businesses it is part of the day-to-day finances. VAT is charged on invoices and recovered on certain costs incurred.
There are special provisions within the VAT legislation specific to medical services, but reviewing and evidencing that those exemptions apply is extremely important. Alec James gives some wise advice.
Generally speaking, VAT is not on the radar of many doctors. The reason is that there is an exemption which covers the majority of your work in the private sector.
There is detailed HM Revenue and Customs (HMRC) guidance regarding VAT for medics, referred to as VAT notice 701/57.
Fundamentally, where your income meets the following two requirements, the income is deemed to be exempt from VAT and therefore your business has no VAT obligations:
1 The services are within the profession in which you are registered to practice;
2The primary purpose of the services is the protection, maintenance or restoration of the health of the person concerned.
As registered doctors providing medical care to patients, your private practice income would usually pass these two tests and therefore is exempt from VAT.
This means you are not required to charge the current VAT rate of 20% on your invoices.
Where an income stream does not meet the two requirements for VAT exemption, you need to consider your VAT position, because the income will be considered to be a ‘VAT-able supply’ – or ‘standard-rated’ as it is formally known.
Protection, maintenance or restoration of the health of a person concerned
This test has come under fire from HMRC in recent years, mainly aimed at cosmetic and aesthetic procedures.
Tax officials have argued that these medical procedures are not to restore a patient’s health, but instead are for purely cosmetic purposes.
There is a specific point within VAT notice 701/57 referring to cosmetic procedures. It reads: ‘Each case will need to be considered on its individual merits.
‘However, we will generally accept that cosmetic services are exempt where they’re undertaken as an element of a healthcare treatment programme. Where services are undertaken purely for cosmetic reasons, they will be standard-rated.’
Evidence needed
While this is in the guidance, it is not enough for the medic to simply make a decision that they believe their income to be exempt from VAT.
Instead, you should have evidence to support your stance. Unfortunately, this also has to be on a case-by-case basis.
It is hard to imagine that your patient records could potentially need to be reviewed by a HMRC official in the event of an inquiry.
And while they cannot request to see the full patient notes, they can request to see an anonymised version to allow the inspector to review the VAT treatment of invoices raised to that patient.
It is therefore extremely important that you ensure your records include the reasons why the patient has come to see you, specifically the health condition that you are treating.
Your notes should record in detail the factors that have led to the patient seeking your advice and services and most importantly the recognised medical condition that is being treated.
For those patients that come to see you for purely cosmetic purposes, this would be a standard- rated supply and you should monitor how much income is received on this basis to see if you need to register for VAT.
Other standard-rated income streams
There are other sources of income which do not meet the healthcare VAT exemption:
Medico-legal work
Many of you will provide medico- legal reports. While these reports are linked to the protection, maintenance or restoration of a patient, this is not the primary purpose and therefore this income stream would not pass the healthcare exemption.
Speaker fees
Speaker fees are another complex area where each presentation you give has to be considered individually.
Again, the VAT notice 701/57 has a specific point in relation to ‘Education services’. Lectures – be they one-off or a series – given as part of a medical training course or continuing professional development (CPD) and training sessions to first aiders, which are provided by a doctor in either a sole proprietor or partnership capacity, are exempt as a supply of private tuition under the education exemption.
Presentations aimed at promoting health are also considered to be exempt, as their principal purpose is to protect the health of the individuals attending.
However, presentations given to a non-medical audience on, for example, the latest medical developments are considered to be taxable.
Once again, the devil is in the detail and you should maintain evidence to support any invoices you raise in respect of speaker fees to show that the invoice is either exempt from VAT or is standard-rated.
Product sales
Some specialties have post-op products which you may sell to patients. These would generally be a standard-rated supply if they are sold individually.
If the product was included as part of your medical treatment, then it may then be covered by the healthcare exemption.
If you are unsure of the VAT status of an income stream, you should seek the advice of a specialist medical accountant.
Do I need to register for VAT?
Currently, the threshold for compulsory VAT registration is when your taxable income exceeds £85,000 on a rolling 12 monthly basis.
When considering this level, you only need to count the taxable or ‘VAT-able’ income of your business, not anything which would be exempt from VAT as detailed in VAT notice 701/57.
If you have a mixture of income streams, you should maintain detailed records of your invoices showing the amounts that are exempt from VAT and those that are taxable.
This will prove invaluable when reviewing your position. Most book-keeping or invoices software systems will allow you to have various headings to allow you to quickly review this.
You are able to voluntarily register for VAT if your taxable income is below £85,000 and this can lead to some tax planning in certain circumstances.
It is worth noting that if all your income is covered by the healthcare exemption, then you are not able to register for VAT.
Having a VAT-registered business
If your business is VAT-registered, then you have certain obligations. Any invoices which you raise should include your business’s VAT registration number.
On invoices with taxable supplies, you should charge VAT. The invoice total should therefore be your fee plus the VAT charge.
The VAT is then collected from your customer and then forwarded to HMRC via your VAT return. When you pay that VAT over to HMRC is dependent on the type of accounting you do for VAT purposes.
Cash accounting vs standard/invoice accounting
Cash accounting is where you only have to pay the VAT to HMRC when you receive the payment from your customer.
This is particularly beneficial if you do a lot of medico-legal work, as there can often be a period of time between you raising the invoice and your invoice being paid.
By using the cash accounting method, your business would not be adversely affected by paying VAT over to HMRC before you have received payment.
Alternatively, you can opt for the invoice or standard accounting method. This means that you incur VAT based on the date of the invoices rather than when the invoices are paid.
You are only able to use the cash accounting method if your taxable earnings are below £1.35m and therefore if the business’ taxable income is in excess of this, you will need to follow the standard method.
Generally speaking, VAT returns are required either quarterly or annually. The returns will declare all the VAT you need to pay over to HMRC.
But it’s not all doom and gloom
Being VAT-registered does have its benefits. If you are VAT-registered, you are able to reclaim VAT on costs incurred in respect of your business. This reduces the overall cost to your business.
If you have a business which has a mixture of taxable and exempt income streams, you may not be entitled to reclaim the full VAT on costs incurred. Instead, you cover a part of the VAT. This is based on the split of your income.
VAT is a complex area and with the added intricacies of the healthcare profession, the use of a specialist medical accountant or VAT expert to review your circumstances should be a part of your annual compliance.
Written for the Independent Practitioner Today, June Issue.
