What you should know about VAT in private practice
What you should know about VAT in private practice
We are all used to paying VAT on many of our day to day purchases but for private practices it is the exception rather than the norm to be VAT registered.
This in contrast to the vast majority of private businesses outside of the medical profession who are VAT registered.
The law requires you to register and charge VAT on your income where your ‘taxable supplies’ exceed £85,000 a year on a 12-month rolling basis.
Taxable supplies is a term within the legislation that covers a huge range of goods and services and basically means that VAT must be charged if you are supplying enough of it.
Also within the legislation are special exemptions to charging VAT and the most notable one for doctors is in relation to the provision of medical services by a health professional which is regarded as an exempt supply for VAT purposes.
No matter how much exempt work is performed by the health professional, VAT registration is not required and is not charged.
It is this exemption for medical work within the VAT legislation that results in most private practices not needing to register for VAT.
What is exempt medical work?
To be regarded as exempt, the work needs to satisfy two conditions:
- The services are within the profession in which you are registered to practice.
- The primary purpose of the services is the protection, maintenance or restoration of the health of the person concerned.
The first condition is usually a given but the second condition can be subject to some debate for certain work, in particular cosmetic or aesthetic work.
The clear majority of work undertaken in relation to a known medical condition is going to be exempt from VAT.
Work undertaken for purely cosmetic or aesthetic purposes is not medical and would be regarded as a taxable supply within your private practice.
If you are undertaking work such as this, if your income level reaches £85,000 or more per year you must register for VAT and charge VAT at 20% on your work.
It is important to note that the £85,000 limit is on a 12-month rolling basis and therefore you are required to look at this each and every month rather than at your financial year end.
Medico legal reports
The most common type of work performed by a doctor that is subject to VAT is medico-legal report writing. It is common within such reports to assess a patient’s condition and possibly make recommendations for treatment.
However, the key factor to consider is that the principle reason for completing the report is for a third party to make a decision, for example a court, rather than for the protection, maintenance or restoration of the health of the person concerned.
Where you are carrying out more than the compulsory VAT registration limit, currently £85,000, of this type of work you must register for VAT and account to HMRC.
What does VAT registration mean?
Being VAT registered results in you becoming a collector of tax for HMRC! You apply VAT to your prices, currently at 20%, and pay this over to HMRC periodically after deducting any VAT that you can recover on your costs.
Claiming back VAT on costs is about the only benefit of being VAT registered and for most this would not be a reason to register for VAT voluntarily, say for those with taxable earning less than £85,000. The additional hassle and admin normally would outweigh the savings from being VAT registered.
When registered, you are required to submit a VAT return to HMRC detailing how much you owe it which is then paid over. Schemes exist to make this process easier but expect to have a visit periodically from HMRC to ensure you are collecting their money correctly!
Schemes to make life easier
As a VAT registered business you can apply for certain VAT schemes to make accounting for VAT less of a burden. There are different criteria for each scheme which your accountant can discuss but a brief description of the common ones are as follows:
Annual accounting scheme – Complete one VAT return per year and make estimated payments.
Cash accounting scheme – only pay over the VAT when you get paid yourself.
Flat rate scheme – pay over a set amount of VAT based on your business sector
These schemes are not mutually exclusive so it is normal to look at using a combination of the schemes available.
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Cosmetic and aesthetic work
This has been a big issue among aesthetic practitioners.
The VAT guidance notices indicate that work carried out for purely cosmetic or aesthetic purposes is not medical and should be treated as a taxable supply i.e. VAT payable on the service.
This area has been a hot topic for years and to date no definitive tax case exists to provide practical and useful guidance for identifying when a procedure is purely cosmetic or aesthetic.
There have been tax inquiries taking place behind the scenes but none of these have reached the level required to be tax law and used as a reference.
A European case a few ago was expected to provide significant guidance in this area but unfortunately fell short of expectations. It did however reiterate that a procedure needs to be purely cosmetic or aesthetic to be standard rated, i.e. no element of medical treatment.
As things stand it is down to the individual doctor to determine whether the work undertaken satisfies the criteria to be regarded as an exempt medical supply. If the exemption cannot be supported the work will be a taxable supply for VAT purposes.
It is important that within your medical notes you record on a case by case basis your assessment of whether a medical condition is being treated where a procedure is cosmetic or aesthetic.
This should include both physical and psychological aspects. While HMRC cannot see the notes itself under a general enquiry, officials can ask for an anonymised sample so it is important that you keep adequate records to support the VAT status.
When it comes to which procedures are regarded as cosmetic, ask yourself the general question of whether the layperson would think they are and ensure that you pay more attention to the documentation that may be required for the taxman.
VAT is a complex tax but for many it will never be an issue to worry about within their private practice.
For those undertaking report writing or work that could be regarded as purely cosmetic or aesthetic it is important that you understand your obligations.
Liaising with your accountant will ensure that you are best placed to avoid a costly mistake in this area.
Ian Tongue is a director of Sandison Easson accountants