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Cosmetic clinic faces up to rejected VAT exemption

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This VAT case pored over whether aesthetic treatments undertaken by a medical doctor are cosmetic procedures subject to 20% VAT, or medical and thus exempt.

27th Jul 2023
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Illuminate Skin Clinics Ltd (ISC) was a private clinic that offered aesthetic treatments such as Botox, skincare, chemical peels and platelet-rich plasma treatments.

The sole director of ISC was Dr Sophie Shotter, a member of the General Medical Council. Dr Shotter had started out as an anaesthetist before deciding to focus on aesthetic medicine in 2012, forming her company in May 2014 and registering it for VAT in August 2014.

VAT treatment

ISC had treated its sales made in the quarter to 31 December 2016 as exempt, on the basis they qualified as medical care. However, following a visit by HMRC, an assessment was raised treating the sales as standard rated and requiring payment of the shortfall.

ISC appealed this assessment to the first tier tribunal (FTT) on the grounds that while it “was aware that treatments with no medical purpose carried out for purely cosmetic reasons would be taxable, such supplies were not routinely carried out by the business”.

Medical care

Medical services can be exempted for VAT purposes subject to VATA 1994 Schedule 9 Group 7. In ISC’s case, only Items 1 and 4 were potentially applicable.

Item 1 includes the supply of medical care by a registered medical practitioner and Item 4 the provision of care, medical or surgical treatments in a hospital or state-regulated institution (it was agreed by all parties that ISC was such an institution).

Section 2 of VAT Notice 701/57 expands on this slightly to say a registered health professional can exempt their services provided they are made within the specific profession in which they are registered. Said services must also be primarily for the protection, maintenance or restoration of the health of the patient. 

The notice states that this would include the diagnosis of illnesses and analysis of scans or samples. This was echoed in the Mainpay case where the court of appeal found that “medical care” meant “diagnosing, treating and, in so far as possible, curing diseases or health disorders”.

Diagnostic process

The issue was, while Dr Shotter was undoubtedly providing services within the scope of her medical registration, both HMRC and the FTT agreed that the services were not medical in nature.

Dr Shotter did not routinely diagnose her patients as the first step in a treatment plan, nor did patients expect this to be the case. Rather, they came to her with a specific treatment already in mind and it was arguable as to whether these treatments even related to a specific disease or health disorder.

HMRC had argued that referrals from another medical practitioner, notes of a diagnostic process or a detailed treatment plan would all potentially have supported an exemption claim. However, no such evidence was supplied by Dr Shotter, even after HMRC requested a wider sample of documents.

In short, Dr Shotter’s services did not relate to “diagnosing, treating and, in so far as possible, curing diseases or health disorders” as required by the Mainpay case.

Medical history

Dr Shotter’s process was to complete an initial medical history form, covering the patient’s concerns, her initial examination and her plan. A section for “diagnosis” was included, however the FTT noted that none of the examples they saw showed recognised health disorders, nor had the patients been referred to her by another professional (with seemingly rare exceptions).

All in all, Dr Shotter’s records appeared to be more aide-memoires than detailed medical notes, especially when compared to the detailed referral notes occasionally received from other medical professionals.

Feel-good factor

Dr Shotter argued that she provided “holistic care”, which the FTT rejected. It was undoubtedly true that patients entered Dr Shotter’s care unhappy and (sometimes) left it happy. However, this did not give the treatment a medical, or even necessarily a therapeutic, purpose.

An example was given of a patient diagnosed (elsewhere) as depressed who had a skin tightening procedure. The patient did not come to Dr Shotter to cure their depression, merely to tighten their skin (which may then have had the side effect of helping their depression), therefore this was not “medical care”.

The FTT concluded that the exemption conditions had not been met and dismissed the appeal.

Easy win

Dr Shotter would have done well to read Neil Warren’s advice in his article on the Skin Rich Ltd case, particularly where he recommended the keeping of very clear and thorough client files showing that the principal purpose of the treatment was medical, not cosmetic.

The lack of evidence of a medical diagnosis, coupled with the nature of the field Dr Shotter operated within, all added up to a fairly easy win for HMRC.

Replies (8)

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VAT
By Jason Croke
27th Jul 2023 16:15

Nice article.

As per your conclusion, exemption could have been achieved with some careful respect of the guidance and legislation, that diagnosis stage is so key and yet often taxpayers don't see the value or point in following the steps...same with splitting a business to avoid VAT registration, do it right or else it leaves a thread for HMRC to pull on.

Thanks (0)
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By Hugo Fair
27th Jul 2023 21:40

It all seemed clear ... until the conclusion:
"The lack of evidence of a medical diagnosis, coupled with the nature of the field Dr Shotter operated within, all added up to a fairly easy win for HMRC."

Is that takeaway meant to indicate that:
- the nature of the business results in an almost automatic requirement for it to be standard rated?
or
- this can (nearly always) be circumvented by dint of keeping adequate 'medical diagnosis' notes?

I'm being slightly tongue-in-cheek, but it's unusual to see respected professionals appearing to say that ... so long as you create the required paperwork then you're hunky-dory (even if the underlying reasons/practices/etc haven't changed one iota).
Is that the takeaway - or have I misunderstood?

Thanks (1)
Replying to Hugo Fair:
VAT
By Jason Croke
28th Jul 2023 08:15

Hugo Fair wrote:

It all seemed clear ... until the conclusion:
"The lack of evidence of a medical diagnosis, coupled with the nature of the field Dr Shotter operated within, all added up to a fairly easy win for HMRC."

Is that takeaway meant to indicate that:
- the nature of the business results in an almost automatic requirement for it to be standard rated?
or
- this can (nearly always) be circumvented by dint of keeping adequate 'medical diagnosis' notes?

I'm being slightly tongue-in-cheek, but it's unusual to see respected professionals appearing to say that ... so long as you create the required paperwork then you're hunky-dory (even if the underlying reasons/practices/etc haven't changed one iota).
Is that the takeaway - or have I misunderstood?


That is how any tax (planning) works Hugo, you take the legislation, you understand the intent of the legislation when it was written and the conditions it puts upon you and then you apply that to the clients situation and see how much of the law fits nicely atop the clients situation, anything that doesn't fit is the risk and then you see if the risk can be removed or reduced.

There is a reason Greggs and Asda put packs of freshly cooked sausage rolls or chickens on tables by the front door, they're zero rated, buy from the hot counter and they're not....a great example of tweaking the business model to gain a tax advantage.

Artificially splitting the business to avoid VAT registration is not illegal, just as long as you follow the Code of Practice rules and you ensure there are no financial, organisational or economic links.....easier said than done of course.

With the cosmetic treatments, take a visit to the dentist for a filing and ask for teeth whitening at the same time, this becomes part of your "treatment plan" and the whole thing is exempt....there is a large grey area if you only visit the dentist for teeth whitening and no other treatment, HMRC guidance says this is standard rated but nobody has ever challenged it, the dentist will just say its part of the "ongoing maintenance of the teeth".

Switch now to a GP who isn't a dentist, they are not qualified to say whether white teeth will maintain your teeth health, so a GP operating a teeth whitening clinic will struggle to argue exemption, unless the GP was supervised by a Dentist who rubber stamps the diagnosis.

What I'm trying to say is that the cosmetic exemption scene is very dependent upon the precise facts, if the GP is doing botox/lip fillers, there is no medical basis for that unless we look at the patients psychological state (feeling ugly) and then lip fillers could be a medical solution but a GP is not a qualified psychiatrist and therefore unable to diagnose whether the patient is depressed, however, get yourself a psychiatrist on site who confirms the diagnosis and now you have a medical diagnosis of depression and the cure is lip filler!

(in theory - none of this is VAT advice/tax planning)

I think your question as to whether this business was always going to be standard rated due to its structure is probably correct, but equally, it could have potentially been structured to reduce the risk of attack (not remove all risk) going forwards, depends on the treatments she offered, I've seen cosmetic practices where some treatments are exempt and some are VATable and that is likely to attract less attention than trying to argue everything is medically exempt.

Thanks (4)
Replying to Jason Croke:
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By Hugo Fair
28th Jul 2023 11:19

Thanks, Jason. No disrespect was intended (to you or to tax planning in general) but, as usual, you've laid out the reasoning with clarity.

I particularly enjoyed the permutations regarding teeth-whitening - which may explain the curious (to me) conversation I had a couple of days ago.
Visit to Hygienist (step 1) prior to Dentist check-up (step 2) - all seen as (and charged as) a single 'treatment'.
At the end of step 1 was asked if I'd like teeth-whitening ... and replied 'probably not, but how much?'
"Oh it's not an extra, it's an all-inclusive price for the treatment!"
[I still didn't bother as I don't think at my age anyone is closely studying my clean teeth.]

Thanks (2)
Replying to Hugo Fair:
VAT
By Jason Croke
28th Jul 2023 12:01

No offence taken, I try not to stray into realm of "tax planning" because its a subjective topic, almost any aspect of tax law can be twisted to achieve a desired outcome, if that statement were not true, then we'd not have things like umbrella companies, PSC's, film schemes designed to make a loss, SDLT structuring calling a house a factory, and everything in between, all of these schemes exist because they are designed to tick the boxes and avoid the obstacles laid down in the law.

My wife works in NHS Dentistry, hence my example. I recently completed an Invisilign teeth straightening treatment, not curing any illness or ailment, yes I wanted straighter and slightly whiter teeth but no clinical reason for it and yet, exempt because a dentist performed it as part of "overall oral health".

One day HMRC will be all over this but are too busy with low hanging fruits, but cosmetic works is a growth industry and when HMRC are properly resourced I'd imagine this sector will be on the radar eventually.

Thanks (0)
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By Casterbridge Hardy LLP
31st Jul 2023 09:55

More bad news - there goes my chance of rolling back the years with a Value Added Tax exempt treatment. Now I will have to figure out how to reclaim the Input Tax..................

Thanks (0)
David Ross
By davidross
31st Jul 2023 11:25

Presumably if you say that your big nose makes you suicidal, it becomes a medical need

The NHS has been known to remove legs from people with body dysmorphia .....

Thanks (0)
Replying to davidross:
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By Hugo Fair
31st Jul 2023 14:06

HMRC has been known to remove an arm AND a leg from people .. just because they can!

Thanks (4)