A comprehensive guide to finance, tax, and VAT in aesthetics

Money makes the world go round”, but it can also make your head spin as a business owner. Many medical professionals transitioning into business ownership often find the financial, tax, and VAT obligations challenging. However, navigating the financial aspects of an aesthetic practice is crucial to business success. This guide aims to simplify these components to help you manage your business effectively.

Business planning

Effective financial management and strategic business planning are cornerstone practices for any successful aesthetic clinic.

The first financial hurdle any business will face is how to fund its new venture, and that’s where a business plan comes in.

Creating a solid business plan is essential for any aesthetic practice. It should detail your startup costs, including equipment, wages, and overheads like insurance and professional memberships.

Additionally, it should provide financial projections, such as cash flow, break-even analysis, and income statements, to help you effectively plan your funding and growth strategies.

A thorough business plan not only guides your initial steps but also serves as an ongoing reference to make sure of your practice's financial health and operational stability.

Your business plan will evolve with you as your business grows, so the financials will need to be updated, too.

More details on creating an effective business plan can be found in our guide to Creating an aesthetics business plan.

In financial terms, the key elements when it comes to business planning are:

1. Startup costs: Detail all initial costs needed to launch your practice. This includes:

• Equipment: Costs for all necessary medical and office equipment
• Wages: Salaries for your initial team, which may include reception staff, nurses, and other support staff
• Premises: Costs related to leasing or purchasing clinic space.
• Insurance: Necessary insurance policies, including liability and property insurance
• Professional memberships: Fees for associations and bodies relevant to the aesthetics field
• Marketing: Initial marketing and advertising expenses to promote your opening

2. Financial projections: Provide detailed financial forecasts that help you plan your funding and monitor growth

• Cash flow statement: An essential tool to track the liquidity of your business. It should outline monthly inflows and outflows for at least the first two years
• Break-even analysis: Calculate the point at which the practice will cover all its expenses from its own revenue. This analysis helps you understand the volume of sales needed to become profitable
• Balance sheet: Provides a snapshot of your business’s financial health at any given point. It lists assets, liabilities, and owner’s equity to show the net worth of the business
• Income statement (profit and loss): Shows operational results over a period, detailing revenues, costs, and expenses to depict the net income

3. Financial management: Discuss how finances will be managed within the business, including the use of accounting software, frequency of financial reviews, and cash handling procedures

Once your business plan is drafted, it's not just a document to secure funding – it's a living guide that helps steer your business. Regularly review and update your plan to reflect changes in the market environment or your strategic objectives. This adaptive approach will help you navigate challenges and seize opportunities as they arise, and make sure that your aesthetic practice remains competitive and financially sound.

Insurance considerations

Insurance is a critical component of running a safe and financially secure aesthetic practice.  

Any claims against your business can have financial implications, so it’s vital you make sure you have the correct policies in place. Properly managing your insurance not only safeguards your business against unexpected events but also means you're fully covered in various situations that could otherwise lead to significant financial distress.

Understanding underinsurance

Underinsurance occurs when the value of the insurance coverage is less than the actual value of the assets or the scale of potential liabilities. This discrepancy can lead to serious financial consequences, especially when a claim is made. For aesthetic practices, this might involve scenarios where expensive equipment or high business turnover is not adequately covered.

Examples and implications of underinsurance:

• Equipment value: If equipment worth £500,000 is insured for only £40,000, and a loss occurs, the insurance will cover just a fraction of the necessary amount. This leaves the practice owner to pay the remaining balance out of pocket, which can be financially crippling
  ‍
• Turnover reporting: A surge in business turnover that is not reported can alter the risk profile of your practice and may lead to denied or reduced claims if the reported figures on the policy are lower than actual

Risks of failing to update insurance policies

Amending and updating your policies is also key. If a practitioner not listed on the policy performs a procedure resulting in a claim, the insurance might not cover it at all. Similarly, if the practice's financials or asset values change without corresponding updates to the insurance policy, any claims made may be partially paid or entirely rejected.

Strategies to manage insurance effectively

• Regular reviews: Conduct regular reviews of your insurance coverage to make sure it matches the current value of your assets and the scale of your operations. This includes updating the policy whenever you purchase new equipment or if there has been a significant change in turnover.
  ‍
• Accurate reporting: Accurately report your turnover and other relevant financial figures to your insurer. This prevents issues with claims and means that coverage matches the risk level associated with your practice's operations.
  ‍
• Coverage adjustment: Adjust your coverage based on business growth or changes in asset value. This proactive approach helps not only maintain adequate coverage but also leverage better terms with insurance providers.
  ‍
• Understanding the 'average clause': Familiarise yourself with the "average clause" in insurance policies. This clause can reduce the payout proportionally to the underinsurance level. For instance, if your assets are insured for only 50% of their value, an insurer may pay only 50% of a claim.
  ‍
• Professional consultation: Engage with insurance professionals who specialise in healthcare and aesthetics. They can offer tailored advice that aligns with the specific needs and risks of your practice.

Nicola Bowtell, Hamilton Fraser’s Account Executive (Healthcare), underscores the importance of keeping insurance policies up-to-date to reflect the real value of your assets and the scale of your liabilities. “The consequences of underinsurance can be devastating – from inadequate coverage in the event of major incidents like fires or thefts to severe cash flow problems or even business closure due to insufficient funds from insurance payouts. Therefore, it is crucial for aesthetic practice owners to take a proactive and informed approach to their insurance needs to make sure of robust protection and continuity of operations.”

You can read more about avoiding common insurance risks here.

Pricing and profit

Effective pricing strategies are not just about covering costs but also maximising patient satisfaction and profitability.

Creating an effective pricing strategy is essential not only for covering costs but also for maximising profit while maintaining high patient satisfaction. The balance between cost, value, and competitive pricing forms the backbone of strategic financial planning in aesthetic services.

Understanding the components of pricing

Cost-based pricing

This method involves summing up all the direct and indirect costs associated with providing a service and then adding a markup to achieve a profit. Direct costs include materials and labour directly involved in delivering treatment, while indirect costs might include overheads like clinic maintenance, utilities, and administrative expenses. The markup percentage can vary, typically depending on the industry standard, desired profit margins, and business objectives.

Value-based pricing

Value-based pricing is focused on the perceived value of the service to the customer rather than the actual cost of providing the service. This strategy considers the benefits and outcomes from the patient's perspective, allowing clinics to price services higher if they deliver exceptional results or unique experiences that patients deem worth the premium. Factors influencing perceived value might include brand reputation, practitioner expertise, technological advancements used in treatments, and overall customer service quality.

Competitive pricing

This pricing strategy involves setting prices based on what competitors charge for similar services. To effectively implement competitive pricing, clinics must conduct thorough market research to determine the standard rate for each service within their geographic and service niche. Prices can then be adjusted to position the clinic competitively—this might mean matching the prices, undercutting them slightly to attract price-sensitive customers, or exceeding them if the clinic offers superior service or outcomes.

Strategies for balancing profit margins with patient satisfaction

• Market research: Continuous market research helps understand patient demographics, preferences, and spending behaviours. This insight allows clinics to tailor their pricing strategies to meet patient expectations and market demands effectively.
  ‍
• Segmentation and tiered pricing: Offering tiered pricing structures can accommodate different patient segments. For example, basic, premium, and luxury treatment packages can attract a broader range of patients, from those seeking cost-effective solutions to those willing to pay a premium for enhanced services or faster results.
  ‍
• Psychological pricing: Implementing psychological pricing tactics, such as pricing treatments at £99 instead of £100, can make prices seem lower than they are, which might attract more price-sensitive customers.
  ‍
• Promotions and discounts: Time-limited promotions or discounts for new patients can draw in clients who might otherwise hesitate at the cost. However, it’s important to manage these carefully to make sure they don’t erode the perceived value of the services or impact the clinic's profitability adversely. It’s also important to be mindful of what procedures you are offering these on. Make sure you remain ethical and never offer promotions on botulinum toxin or other prescription-only medicines (POMs).
  ‍
• Transparency and communication: Being transparent about pricing helps build trust with patients. Clear communication about what each price includes can minimise misunderstandings and enhance patient satisfaction. Discussing the outcomes, maintenance costs, and potential additional charges from the outset can help manage patient expectations effectively.

Effective pricing is dynamic and should be regularly reviewed to adapt to changes in costs, market conditions, patient preferences, and competitive landscapes.

Tax returns

Whether you are self-employed or running a larger clinic, you must handle tax returns carefully to guarantee compliance and optimise potential deductions.

For any business owner, understanding tax obligations is key. Whether you are self-employed or running a larger clinic, proper handling of tax returns makes sure you are compliant with financial regulations and can significantly affect the business's bottom line through potential deductions and credits.

Key tax obligations for aesthetic practitioners

• Understanding taxable income: All income generated from aesthetic services, including treatments and product sales, is subject to income tax. It’s crucial to maintain thorough records of all transactions, as this will form the basis of your tax returns.
  ‍
• Deductible expenses: Many expenses incurred in the running of your clinic can be deducted from your taxable income. These include costs related to rent, utilities, equipment purchases, and maintenance, as well as expenses for staff training and salaries. Proper documentation of these expenses is critical for claiming them accurately on your tax returns.
  ‍
• Capital allowances: Investment in clinic equipment can often be counted as a capital expense, which may not be fully deductible in the year of purchase. Instead, these items might be eligible for capital allowances, which allow the cost to be written off against taxable profits over several years. Understanding how to apply these allowances can significantly reduce your tax liability.
  ‍
• Employment taxes: If you employ staff, you're responsible for deducting income tax and National Insurance contributions from their salaries under the PAYE (Pay As You Earn) system. You also need to make National Insurance contributions, which should be factored into your financial planning.
  ‍
• VAT obligations (see next section): Depending on your turnover, you may need to register for VAT. Once registered, you'll need to charge VAT on applicable services and products, and you can reclaim any VAT you pay on business-related purchases. The distinction between cosmetic and medical treatments can affect VAT charges, as some medical procedures may be exempt.

Practical advice for managing tax returns

• Keep comprehensive records: Maintain detailed and accurate records of all financial transactions, including invoices, receipts, and bank statements. Digital accounting software can facilitate this process and help make sure that all figures are accurate and up-to-date.
  ‍
• Stay informed on tax changes: Tax laws can change frequently, so it’s important to stay updated on any changes that could affect your practice. This may involve consulting with a tax professional or attending relevant training and seminars.
  ‍
• Utilise professional help: Hiring an accountant specialising in medical or aesthetic practice taxation can be highly beneficial. They can provide advice tailored to your specific circumstances, helping to optimise your tax returns and make sure of compliance.
  ‍
• Plan for tax payments: Set aside funds regularly to cover your expected tax bill. This can prevent the financial strain of a large lump sum payment when taxes are due and can help avoid penalties for late payments.

Common pitfalls to avoid

• Underreporting income: All sources of income must be reported to avoid penalties. This includes any ad hoc services or cash payments.
  ‍
• Overclaiming expenses: Only claim for expenses that are strictly business-related. Personal expenses must be meticulously separated from business expenses to avoid issues with tax authorities.
  ‍
• Ignoring deadlines: Late submission of tax returns can result in penalties and interest charges. Keeping track of all relevant tax deadlines is essential.
  ‍
• Neglecting to update records: Regularly updating financial records can prevent discrepancies and issues during tax filing. This includes updating asset valuations and inventory lists.

VAT in the aesthetics sector

VAT can be complex, especially in distinguishing between medical and cosmetic treatments. Read on to find out more.

Navigating VAT (Value Added Tax) in the aesthetic sector can be a daunting task. VAT is a tax levied on most goods and services. For businesses operating in the aesthetic sector, it is crucial to determine whether their services are subject to VAT or can be classified as VAT-exempt medical procedures.

VAT registration and thresholds

• VAT Registration: All aesthetic practices with a taxable turnover exceeding £90,000 in any 12-month rolling period must register for VAT. This includes income from both cosmetic treatments and other taxable supplies like product sales or training services.
  ‍
• Proactive compliance: Voluntary VAT registration before reaching the threshold can be beneficial. It allows businesses to establish compliance practices early and potentially limit HMRC’s ability to assess VAT obligations retrospectively beyond four years.

Distinguishing medical vs. cosmetic treatments

• Legal requirements for exemption: To qualify for VAT exemption, treatments must be provided by a professional registered on a recognised medical register and must be primarily for medical purposes
  ‍
• Documentation and proof: Accurate documentation is crucial. It's not enough for a treatment to have a medical aspect; its primary purpose must be medical to qualify for VAT exemption. This means keeping detailed records that demonstrate the medical necessity of each treatment on a patient-by-patient basis

Record-keeping for VAT purposes

• Importance of detailed records: Thorough patient records that clearly document the medical purpose of treatments are essential. This includes detailed notes on the diagnosis, the rationale for deciding on a particular treatment, and how the treatment serves a medical purpose
  ‍
• Avoiding common pitfalls: A common mistake is the inadequate categorisation of treatments as either exempt or taxable without considering each case's specifics. The VAT liability must be determined based on the primary purpose of the treatment, supported by clear and detailed evidence

Managing VAT on products and equipment

• VAT on sales: The VAT treatment of products depends on their use. If a product is sold separately from a treatment, it is typically a taxable sale. However, if it is provided as part of an exempt medical treatment, it may also be exempt from VAT.
  ‍
• Equipment usage: The VAT on expensive equipment like lasers can be recoverable if used solely for taxable cosmetic treatments. If used for both taxable and exempt treatments, only a portion of the VAT can be recovered, depending on the proportion of taxable sales

Strategies for VAT risk management

• Consulting VAT specialists: Given the VAT complexities in the aesthetics sector, working with a VAT specialist familiar with industry-specific challenges is crucial. This makes sure of correct VAT law interpretation and compliance
  ‍
• Ongoing education and vigilance: Stay informed about VAT requirements and maintain meticulous records. This proactive approach helps in managing VAT risks effectively and means you are compliant with HMRC regulations.

For more insights from Veronica Donnelly, read ‘Q&A with Veronica Donnelly: Insights on VAT in the aesthetic sector’ and ‘A comprehensive guide to VAT in the aesthetics sector’.

‍