Baby’s first picture is VAT-free
Is a pregnancy scan medical care (exempt from VAT exempt) or a baby bonding experience (standard rate VAT)? Emma Rawson explores the case of Window To The Womb TC07687.
Window To The Womb (WTTW) Ltd grew from a family business started in 2003 into a franchise model. It offers a number of different types of pregnancy scans, including early pregnancy scans to check viability, date pregnancies or provide general reassurance and several packages for later pregnancy.
The basic later pregnancy scan package comprises a number of medical checks and provides a detailed report and a single 2D image. Other packages all include the same basic scan and report, but come with added extras such as information on the baby’s position and size, gender confirmation, 4D images and other products (keyrings, heartbeat recordings etc.)
The main question in the case was whether these scans should be standard rated or exempt for VAT purposes.
Exemption for medical care
Group 7 of Schedule 9 of the VATA 1994 sets out that the "supply of services consisting in the provision of medical care" by certain registered persons is exempt from UK VAT.
It was accepted that all of the scans were provided by registered radiographers, and therefore the only real issue before the FTT was whether the services provided were medical care.
HMRC argued the supplies were not medical care, but reassurance or a baby bonding experience. By contrast, the taxpayers argued that the scans were supplies of medical care, as the primary thing any customer sought was to know that their baby was healthy and the pregnancy progressing normally.
The key question was whether, taking into account the perspective of the typical customer, the principal purpose of the scan was to diagnose, monitor, treat or prevent illness.
FTT found that the principal purpose of the early pregnancy scans was to diagnose any medical conditions, determine whether a pregnancy was viable or identify any early issues (such as ectopic pregnancy). Around a third of these scans were requested where a woman had bleeding or pain, and only a single 2D image was provided. The principal aim was therefore clearly not baby bonding or obtaining images.
Even where an early scan was only sought for reassurance, with no clinical need, or an equivalent scan was available under the NHS, that did not necessarily mean that it did not amount to medical care. Customers received a detailed report and in doing so were choosing to monitor a medical condition. On the same basis, HMRC accepts that hearing tests or sight tests amount to medical care without needing a clinical indication.
The FTT went on to conclude that all of the later pregnancy scan packages offered by WTTW were also medical care and therefore exempt from VAT.
The FTT was confused by customers opting to pay extra to have the baby’s gender confirmed, as this service is routinely offered as part of the NHS 20-week scan. They concluded that it was unlikely a customer would purchase a scan solely to identify the gender of the foetus. Instead, the principal purpose was again to obtain a detailed medical report, making the supply of these scans exempt medical care.
This is surprising, as any mum will attest babies, even in utero, are not co-operative, and therefore the NHS scanner may not have had a good enough view to be certain.
Images of the baby
The remaining scan packages all involved the provision of 4D-images alongside a detailed medical report. Whilst acknowledging that the position was less clear in relation to these scans, the FTT was satisfied that they were also exempt medical care.
The key issue was that customers could not choose to just have 4D imagery without also receiving a medical report. Since most customers purchased scans without 4D imagery - and the added extra cost of such imagery was much less than that of a basic scan - the FTT felt it was unlikely that they were paying for a scan principally for the resulting images.
Providing only 4D images without the accompanying report would have saved the taxpayer costs of £100,000 per clinic per year. If the key service was a bonding experience and high-quality images, then arguably the taxpayers could have chosen to avoid this additional cost.
Is this the last word?
This FTT decision is not binding, and HMRC may appeal, especially as cases involving other franchisees stand behind this one.
The decision contains a number of conclusions which could be challenged on appeal, particularly when it comes to the supply of 4D images and other added extras.
Although 4D imagery could not be purchased on its own, that does not mean it was not the main thing customers were looking for. It could be argued that, unless they have existing concerns about their pregnancy, most women buying one of these packages are looking for 4D images and the scan experience.
The promotional material for these scans also emphasised that they were a baby bonding experience and highlighted the imagery available. This only changed once HMRC had challenged the VAT treatment, something the FTT could not accept was a coincidence.
The FTT’s conclusion that the primary purpose of scans which included determination of gender was medical care could also be open to challenge, especially as this package also provided a "4D peek", the cheapest way for parents to get such a view of their baby.
Even if this decision is not appealed, it should not be taken to mean that all supplies of pregnancy scans are exempt from VAT. The decision was very fact-specific, with the FTT looking in detail at the exact services offered under each scan package.
In particular, the FTT placed great weight on the provision of a detailed medical report with every scan. If a business merely provides scanning images without this element it may be difficult to argue that they are providing medical care.
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Emma a technical officer with the Association of Tax Technicians (ATT). Her background is in corporation tax and she also has a focus on VAT.
She trained with Deloitte, working in both their London and Leeds offices, and also spent a short time working in a specialist consultancy firm providing advice to other practitioners before joining...