MHA | Supplier of cosmetic services faces £1.6 Million VAT bill…

Supplier of cosmetic services faces £1.6 Million VAT bill following dispute with HMRC

Carolyn Van Hecke · Posted on: February 5th 2024 · read

Laser face treatment

What’s the issue?

Following the recent VAT Tribunal case of Illuminate Skin Clinics Ltd, another private medical clinic – Limited (“ADCL”) - has challenged the VAT liability applied by HMRC and has also lost. HMRC raised a huge assessment against ADCL for VAT totalling £1.6 Million for failing to register and account for VAT dating back to 2010.

HMRC confirm in its guidance that it will usually treat the provision of cosmetic services as exempt from VAT if they are undertaken as an element of a health care treatment programme. However, services undertaken purely for cosmetic reasons will be standard-rated.

The VAT legislation sets out a two-part test for medical exemption to apply:

  1. You are a medically qualified person on a statutory medical register, and you are acting within the profession in which you’re registered to practice; and
  2. The primary purpose of the services is the protection, maintenance or restoration of the health of the person concerned.

In the case of ADCL, the Tribunal referred to the earlier decision of Mainpay Ltd v HMRC [2022], and confirmed that for VAT exemption to apply, the service must amount to “medical care”. This has been defined as “diagnosing, treating and, in so far as possible, curing diseases or health disorders”. It is not enough that the services are supplied by a person enrolled on one of the statutory medical registers.

The burden of proof was on ADCL who tried to argue that the services were eligible for exemption because they had a “therapeutic purpose” and were “holistic care”. The Tribunal accepted that health disorders could include psychological issues, but considered that ADCL had not demonstrated the nature and extent of such issues for its patients. The Tribunal concluded that patients wanted to feel better and look less tired or old. This is not medical care within the established meaning of the term.

How can we help?

We are aware that HMRC is actively targeting cosmetic clinics. If you are in the industry and are treating services as VAT exempt healthcare services, you should review the treatment as a matter of priority. Don’t wait for HMRC to come calling!

Mistakes regarding the VAT liability of supplies can be extremely costly and critical to the survival of your business. HMRC may backdate a VAT registration by up to 20 years and demand amounts of VAT from the date the VAT threshold was breached. They can also charge penalties and interest. Where your customers are private individuals, it is unlikely that VAT due will be able to be passed on and so will represent a cost to your business.

Therefore, if you are making supplies of cosmetic treatments which you believe to be VAT exempt supplies of medical or healthcare services and you would like reassurance that the risk is being effectively managed, consider taking specialist advice to confirm the VAT liability. Or if HMRC has already contacted you to start a review, within our team we have ex-HMRC VAT Inspectors who are experienced at negotiating with HMRC and dealing with VAT disputes. Please contact Carolyn Van Hecke for a free no-obligation initial discussion.