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HMRC have published Brief 06/07, which announces the implementation of changes to the exemption from VAT for medical services, following the European Court of Justice (ECJ) decision in the case of Dr Peter d’Ambrumenil and Dispute Resolution Services (C-307/01).

The changes will take effect from 1 May 2007 subject to House of Commons approval. They affect certain services provided by health professionals registered on a statutory professional register that are registered for VAT. They will not impact on primary health care and core NHS services, which will remain free from VAT.

This case concerned the VAT exemption for health services provided by health professionals registered on a statutory professional register. The court held that the exemption is restricted to ‘medical care’, which it defined as those services intended principally to protect (including maintain or restore) the health of an individual. Medical services which are primarily for the purpose of enabling a third party to take a decision - many of which are currently exempt from VAT under UK law - are taxable. This means that VAT liability is dependent on the purpose for which the supply is made - referred to as the ‘purpose test’.

With effect from 1 May 2007 the exemption from VAT for health services will be limited to those services which constitute the provision of ‘medical care’.

The services most affected by the changes are:

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

From 1 May 2007 these services will be liable to VAT at 17.5%.

HMRC are now warning that this summary is not exhaustive, and health providers should therefore consider the liability of all their services in conjunction with the guidance given in VAT Notice 701/57 Health professionals (January 2007).

The changes will affect health service providers registered on a statutory professional register who provide affected services and whose total taxable income is now over the VAT registration threshold, or who are already VAT registered.

Where the health provider is not already VAT registered, they will need to consider their turnover and if the value of all their taxable supplies, including the income from affected services, is over the registration threshold, they will need to register for VAT at the appropriate time. They will then have to account for VAT on all their taxable supplies, but will be able to reclaim VAT on those purchases and expenses which relate to taxable supplies, in accordance with the normal VAT recovery rules and, in particular, the partial exemption regulations.

Registered health professionals who are already registered for VAT, for example, as a result of dispensing changes which took effect on 1 April 2006, will need to ensure that they account for VAT as appropriate on any affected services.

Links
HMRC Brief 06/07 VAT: changes to the exemption for medical services from 1 May 2007

VAT Notice 701/57 Health professionals (January 2007)

Summary of Responses: VAT: Review of the scope of exemption for medical services

VAT: Liability treatment of medical services - Regulatory Impact Assessment