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Steve Allen, Director of VAT Solutions (UK) Ltd, considers the effect of VAT changes on medical services.

Introduction

The new rules on VAT exemption for medical services have finally been announced by HMRC, and will take effect from 1 May 2007.  The changes come as a result of the ECJ’s decision in Dr Peter D’Ambrumenil (C-307/01), which held that ‘medical care’ is defined as those services intended principally to ‘protect, maintain, or restore’ the health of an individual. All care and treatment provided through the NHS continues to be exempt from VAT, but medical services that enable a third party to take a decision will become liable to VAT.

Whilst most insurance-related services remain exempt from VAT for the time being (particularly in light of our own Tribunal win in Morganash Ltd (MAN/05/0749), where it was ruled that medical services required to obtain a life insurance policy fell within the UK exemption for insurance-related services), it must be remembered that the insurance exemption is currently being reviewed by the European Commission.  As such, there is a risk that medical services relating to insurance may in future become subject to VAT.

Affected services

In Revenue & Customs Brief 06/07, HMRC say the affected services are:

• witness testimony/reports for litigation, compensation or benefit purposes
  
• reports/medicals for the purpose of providing certain fitness certificates
  
• some occupational health services.

These services will be liable to VAT from 1 May 2007. The summary is not yet exhaustive, however, as discussions are still ongoing between HMRC and the medical sector.

Medical practices

If a medical practice is not currently VAT registered, these changes will only affect it if standard-rated income exceeds the VAT threshold (currently £64,000). If a practice exceeds the limit, or is already VAT registered as a consequence of last year’s changes in the funding of the VAT incurred on drugs purchases, VAT will be chargeable from 1 May 2007. We would recommend that practices review their VAT income streams before 1 May 2007, as accounting systems will need to be adjusted to capture the changes. For practices that are already VAT registered, the increase in standard rated supplies will generate a small benefit in the amount of VAT that can be reclaimed on a practice’s overheads.

Practices that are not VAT registered should keep their standard-rated income under review and, if approaching the £64,000 threshold, take a reasoned view of whether they should try and remain under it, thereby avoiding the compliance costs brought about by VAT registration. Doctors providing standard-rated services as individuals, rather than through the partnership, need not count these towards a partnership’s £64,000 threshold, although HMRC has the power to consolidate this income if it believes the split of income is intended solely by avoid VAT registration.