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clinician drawing outline for hair transplant | accountingweb | Aesthetic treatments not medical care for VAT purposes
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Cosmetic clinic left with hair-raising VAT bill

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A clinic offering aesthetic treatments tried to argue that the psychological benefits made it VAT-exempt. However, HMRC was not minded to agree.

8th Feb 2024
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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 enquiries

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 [2020] 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. 

Clinical evidence

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.

Therapeutic benefits

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.

Timely reminder

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.

Replies (20)

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By FactChecker
08th Feb 2024 12:56

"The fact that those cosmetic services were supplied by registered medical practitioners did not make them exempt"
D'oh, what next - my house electrics were repaired by a Dr so the fees must be VAT exempt?

Stunning what intelligent people can believe if it suits them so to do!

But the real takeaway ... just because "it's how we've always operated", doesn't mean you haven't been wrong all along.

Thanks (5)
Replying to FactChecker:
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By graydjames
09th Feb 2024 09:53

FactChecker wrote:

"The fact that those cosmetic services were supplied by registered medical practitioners did not make them exempt"
D'oh, what next - my house electrics were repaired by a Dr so the fees must be VAT exempt?

Stunning what intelligent people can believe if it suits them so to do!

But the real takeaway ... just because "it's how we've always operated", doesn't mean you haven't been wrong all along.

A dog has four legs, my cat has four legs therefore my cat is a dog. I think they call that faulty logic - a fallacy of composition. In short, an absurd and wholly invalid argument to use in this case.

Unlike most, I have some sympathy for these guys who presumably will put out of business by this decision. Yes, of course, they should have taken advice, and that was their mistake, but it is palpably a grey area that needs clarification and it is shame that they paid the price for this.

Thanks (2)
Replying to graydjames:
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By FactChecker
09th Feb 2024 13:49

"In short, an absurd and wholly invalid argument to use in this case"

You are (I hope deliberately) completing missing the point ... in that the 'example' I gave was an illustration of just how wrong people get this logic - if it suits them!
They read the bit about exemption for medical procedures / note that medicine is involved somewhere in the activity that they are considering / and jump to the conclusion that it *must* be VAT exempt (as that is what they want to hear) without bothering to read any of the associated wording.

The area is really not that grey - unless you deliberately choose not to illuminate it!

And my point about "the real takeaway" still stands ... whoever is responsible for considering the issue should review the decision at least annually. Not only may the earlier decision turn out to be wrong, but regulations change. Caveat taxpayer.

Thanks (4)
Replying to FactChecker:
Stepurhan
By stepurhan
13th Feb 2024 13:19

FactChecker wrote:
D'oh, what next - my house electrics were repaired by a Dr so the fees must be VAT exempt?
Except that is clearly a straw man argument that is not representative of the case.

The service was provided by medical professionals AND was argued to be a medical activity (the provision of a treatment that had therapeutic benefits and thus was beneficial to patients mental health). Was it a solid argument? Probably not, but it also nowhere near as black and white as your facetious example implies.

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Replying to stepurhan:
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By FactChecker
13th Feb 2024 15:04

Not sure why you (and graydjames prior to that) took such grave exception to my "facetious example"?

As I've already said: "the 'example' I gave was an illustration of just how wrong people get this logic - IF it suits them!"

But the example wasn't a criticism of the people involved in the case set out in the article ... for whom a valid criticism would be the other point that I've made 3 times now:
"the real takeaway still stands ... whoever is responsible for considering the issue should review the decision at least annually. Not only may the earlier decision turn out to be wrong, but regulations change. Caveat taxpayer."
Surely you don't disagree with any of that?

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Tom Herbert
By Tom Herbert
08th Feb 2024 15:47

Ah well, you know what they say about VAT exemptions - hair today, gone tomorrow...

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Replying to TomHerbert:
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By johnjenkins
09th Feb 2024 10:31

Tom, that was hair raising. Bout time you got on my wavelength.

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Replying to TomHerbert:
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By AS44NG
11th Feb 2024 12:40

A bald statement.

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Replying to AS44NG:
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By johnjenkins
12th Feb 2024 08:36

We're heading in the right direction.

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VAT
By Jason Croke
08th Feb 2024 16:45

This was destined to fall foul of the medical exemption and I wonder if the business ever took proper advice.

There are some medical procedures which are intrinsically cosmetic but can be pushed into the exemption with the right clinical consultation which identifies a clear medical issue and a clear course of action to protect, restore or maintain that persons health.

There are other medical procedures which really are only for cosmetic purposes.

It is probably the right time for the government to review the legislation with a view to making the exemption much tighter to remove any ambiguity, cosmetic surgery is a growing sector, whether it is tooth whitening or botox lips, anyone can do these treatments, takes a couple of hours of training, you can be working in McDonalds in the morning and doing Botox in the afternoon.

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Replying to Jason Croke:
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By FactChecker
08th Feb 2024 17:05

Are you suggesting the person would be handling the same 'materials' in both cases? :=)

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Replying to FactChecker:
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By johnjenkins
09th Feb 2024 10:32

Some peoples cheeks look like they have a burger in them.

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By Mentinor
08th Feb 2024 21:42

clearly a stupid judgment , obviously made in order to screw the taxpayer for more revenue, many of these procedures are clearly to treat medical conditions, for example excessive or inadequate dht is associated with many problems, prostate, development of genitalia , hair loss and the obvious psychological issues which is why people spend huge amounts of money in the first place which is not funded by the good old nhs , i wonder whether the good old incontinent tribunal would deem sex change procedures exempt ? , no need of course because they are carried out free by the nhs

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Replying to Mentinor:
the sea otter
By memyself-eye
09th Feb 2024 09:47

meeeowww....

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Replying to Mentinor:
By plummy1
09th Feb 2024 10:30

Isn't one of the points here that the tax payer could have been exempt if they had kept adequate records for each client detailing the psychological needs that were being met. Although no doubt some of the treatments had a psycholical element I suspect most were due to vanity and / or a desire to halt the signs of aging. The tax payer should have taken professional advice in my opinion at the earliest opportunity.

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Replying to plummy1:
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By johnjenkins
09th Feb 2024 10:36

Vanity or a desire to halt old age is surely psychological.

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Replying to johnjenkins:
By plummy1
09th Feb 2024 11:22

Following that line of thought there would need to be a VAT exemption for make-up, hair dye, sports cars purchased by men going through a midlife crisis and a hundred other things. I doubt the taxpayer went through a detailed psycholical profile of each patient and tried to discourage their clients.

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Replying to plummy1:
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By johnjenkins
09th Feb 2024 11:36

I presume if a psychological report was done (highly unlikely) then yes.
How many women have mental health issues when they go through the menopause.
As Ian says it can be a minefield especially when people "push" the boundaries.

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Replying to Mentinor:
VAT
By Jason Croke
09th Feb 2024 11:11

Sex change procedures would fall under exemption because the patient has to go through extensive psychological assessments over several years, they would then receive a medical diagnosis (likely body dysmorphia) and a treatment plan (sex change).

It's the diagnosis performed by a qualified psychologist that is the key here, with the clinic in this VAT case, there was no genuine medical diagnosis as the person offering the consultation was not a specialist in mental health issues (not a psychologist) and the exemption requires the person to be offering advice in their chosen field/medical register.

A dentist can exempt their supply of dental treatment but if they started to do liposuction that is a procedure not within their medical registration so would be taxable. Likewise, an optician can exempt their eye tests but if they started doing Botox, that is outside their medical qualification, they cannot possibly "diagnose" a medical condition requiring Botox as the treatment if that is outside their qualification.

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By Ian McTernan CTA
09th Feb 2024 11:06

As someone who acts for a client in this area, it's a minefield. Luckily for me my client understands the VAT rules in this area better than me (and we took some specialist advice too!), and charges VAT where appropriate. Clinical records are always kept in case of any VAT enquiry. We registered the business on day one.

Most are purely cosmetic in nature: it could be argued that they are dealing with underlying mental health issues but mostly these could be dealt with without having the cosmetic procedure.

The other issue is VAT on the materials used, also not easy!

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