Cosmetic clinic left with hair-raising VAT billby
A clinic offering aesthetic treatments tried to argue that the psychological benefits made it VAT-exempt. However, HMRC was not minded to agree.
Readers will understand the consequences of failing to register for VAT on time, usually when starting up a new business. If your business is in an exempt sector – health, charitable or educational for instance – are you sure that your supplies are exempt?
In Aesthetic-Doctor.com Ltd, case TC09030 a cosmetic clinic that provided botox and hair transplants among other treatments found to its great financial cost that its supplies fell outside of the medical exemptions. The first tier tribunal (FTT) rejected an appeal against HMRC’s decision to register its cosmetic clinic business back to 2010.
The clinic, known as the Dr Darren McKeown Aesthetic Medicine Institute, was set up in 2008 when Dr McKeown was still working in the NHS. He is a qualified doctor, registered with the General Medical Council (GMC). It was registered as an independent clinic regulated and inspected by Healthcare Improvement Scotland (HIS) since 9 March 2017.
HMRC started an enquiry for corporation tax in 2018 and subsequently opened a VAT enquiry. This became a code of practice 9 investigation, where the taxpayer agrees to an honest and open declaration of all deliberate behaviour in creating a tax loss and any other irregularities. In return, HMRC treats the matter as a civil rather than a criminal case.
The appeal was against a decision of HMRC issued in April 2020 that the services supplied by the appellant were not exempt and that the appellant would be registered for VAT from 1 June 2010. An assessment for £1.65m was subsequently issued.
The matter falls under retained EU law Article 132 (1) (c) Council Directive 2006/112/EC, the Principal VAT Directive (PVD). This exempted services provided by surgeons, GPs and nurses essentially as medical care, which EU case law has identified as an autonomous and independent concept. The UK enacted this in VATA 1994, Sch 9, Gp 7, item 1.
Was it medical care or just cosmetics?
The appellant contended that the services supplied were principally for the prevention, diagnosis, treatment or cure of a disease or health disorder or the protection, maintenance or restoration of health. HMRC contended that the services supplied by the appellant were cosmetic in nature and fell outside the exemption. The fact that those cosmetic services were supplied by registered medical practitioners did not make them exempt. The appellant argued that HMRC had exceeded its powers in denying exemption given there was no specific exclusion in EU law for cosmetic services.
The FTT considered the facts and circumstances referring to Court of Appeal (CA) Mainpay Ltd  EWCA Civ 1620 and in particular the comments of the upper tribunal (UT) in the same case as well as other established EU case law. The FTT also considered recent FTT cases concerning similar treatments although these are non-binding in the current matter.
Dr McKeown gave evidence as to the history of the clinic and explained how records were kept in respect of patients. The FTT also referred to a mention in the notes of a letter to HMRC regarding a BBC documentary in 2016 that looked at the subject of aesthetic medicine. The clinic seemed to grow after this, taking on additional clinical staff including sub-contracting surgeons as well as GPs and nurses.
Dr McKeown explained that people wanting a Kardashian look would go elsewhere as his clinic was more for those who wanted therapeutic help alongside the procedures offered. Dr McKeown gave detailed evidence but the FTT found it difficult to pin down exactly what services were supplied over the years. These included injectables of botulinum toxins (botox), facial fillers for lips and face and laser treatments for the repair of sun-damaged skin and since 2015 eyelid surgery and face and neck lifts. From 2016 and possibly earlier, hair transplantation was also offered although its HIS certificate precluded this. Other procedures were on offer including breast enlargements and fat reduction but again the FTT had difficulty determining how many of these procedures were carried out.
In addition, records or samples of records, some known as Full File notes, were presented to back up the appellant’s claim that treatments had a psychological and therapeutic element, which brought it into the exemption being similar to the services provided by GPs.
The appellant claimed that cosmetic procedures provided therapeutic benefits including greater self-esteem. The FTT dismissed the idea that calling it holistic made it a medical procedure. The appellant did not diagnose, treat or cure health disorders or disease and as such the services fell outside the exemption. The FTT found that the samples and Full File notes did not provide evidence that treatment involved medical care and neither did Dr McKeown’s oral evidence. The fact that registered medical practitioners undertook the procedure did not bring them within the scope of the exemption.
There have been several cases involving the medical and cosmetic industry in recent years. The fact that until the corporation tax enquiry in 2018 the appellant was operating a taxable business for VAT purposes meant that HMRC was able to backdate his registration to 2010. A timely reminder for any business that thinks that its activities are exempt or outside the scope of VAT to make sure they have taken all steps to mitigate against any HMRC enquiry.
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James has over 30 years experience in VAT having trained with HM Customs & Excise he has worked in practice, including a Big Four firm as well as running his own consultancy. He also has extensive experience in public sector VAT, as well as previously advising the Federation of small businesses.