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Navigating VAT (Value Added Tax) in the aesthetic sector can be a daunting task for practitioners, particularly when it comes to distinguishing between medical and cosmetic treatments.
This guide will explore the fundamentals of VAT in the aesthetic industry, incorporating detailed explanations and advice from Veronica Donnelly, a highly experienced VAT advisor and head of the aesthetic sector advisory team at Azets.
Veronica will also be speaking at Hamilton Fraser’s Aesthetics Business Conference on Tuesday 8 October, explaining the current law and guidance as it affects aesthetic treatments
For more information read our Q&A with Veronica, ‘Insights on VAT in the aesthetic sector’ and our separate guide, which is packed with tips from Veronica, ‘A comprehensive guide to finance, tax, and VAT in aesthetics’.
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. According to Veronica Donnelley, an experienced VAT adviser and partner at Azets, the critical challenge lies in making this distinction correctly.
She states, “The law requires that to qualify for VAT exemption, a service must be provided by someone on a medical register and must be for a medical purpose. This means that even if a treatment has a medical aspect, it may still be subject to VAT if its primary purpose is cosmetic.”
This sentiment is echoed by the Aesthetics Journal, which emphasises the necessity of clear documentation and a thorough understanding of what constitutes a medical purpose under VAT law.
The two-part test that determines whether a service qualifies for VAT exemption:
If both conditions are met, the service can be considered VAT-exempt. However, Veronica warns, “It should be a very simple binary test. Qualifications are easier. Are you regulated? Are you not? What are you trained to do? The problem you have is ‘medical care’ because there is no legal definition of it. So, if we don't understand what that term means, how can we enact the law?
What are you trained to do? The problem you have is ‘medical care’ because there is no legal definition of it. So, if we don't understand what that term means, how can we enact the law?
"Even businesses that understand these criteria often fail in their record-keeping to provide adequate evidence to HMRC (Her Majesty's Revenue and Customs) that their services qualify as medical care."
Two first tier tribunal cases in the sector have been granted permission to appeal. The Upper Tribunal, a court of record, will hear these cases, meaning its decisions will apply legal force across the entire sector.
“The outcome of these cases could clarify the tests for VAT exemption—whether the focus should be on whether a treatment is purely cosmetic or whether it serves a medical purpose”, says Veronica. “This will be a significant step forward for the industry.”
VAT registration threshold
The VAT registration threshold is a critical aspect for any business in the aesthetic sector. As of now, the threshold stands at £90,000. If a business’s taxable turnover exceeds this amount within any 12-month rolling period, it is mandatory to register for VAT. This includes income from cosmetic treatments and any other taxable supplies, such as product sales or training services.
"The decision to register for VAT isn't just about reaching the threshold; it also involves understanding your business's taxable turnover and being proactive about compliance. Voluntary registration, even before reaching the threshold, can sometimes offer protection, limiting HMRC’s ability to assess VAT obligations beyond four years.
“Where some businesses go wrong is in trying to classify too many services as exempt without sufficient evidence. HMRC is becoming more rigorous in scrutinising these claims, and businesses need to be prepared to justify their exemptions thoroughly. If your taxable supplies exceed the £90,000 threshold, VAT registration is not optional—it's a legal requirement.”
- Veronica Donnelly, VAT Partner at Azets Holdings Limited
A common pitfall in the aesthetic sector is the assumption that certain treatments are automatically exempt from VAT because they have a medical component. Veronica clarifies, “Businesses often make the mistake of categorising entire types of treatments as either exempt or taxable without considering the specific circumstances of each case. The VAT liability must be determined on a patient-by-patient basis.”
The Skin Rich Ltd tribunal case serves as a cautionary tale. The tribunal emphasised that the primary purpose of the treatment – whether medical or cosmetic – must be supported by clear and detailed evidence. Veronica advises, "It’s not enough to claim a treatment is medical; you must have comprehensive patient records that justify the medical necessity of the treatment to support any VAT exemption claim."
Accurate and detailed record-keeping is essential for aesthetic businesses aiming to qualify for VAT exemption. Veronica stresses the importance of maintaining thorough patient records that clearly document the medical necessity of treatments. She explains, “The key is in meticulous record-keeping. Businesses must document not only the treatments they perform but also the medical justifications for these treatments. It’s not enough to just diagnose and treat; you need to explicitly record how you arrived at that diagnosis and what the primary purpose of the treatment is. This level of detail can make all the difference if HMRC comes knocking.”
This need for meticulous record-keeping is further underscored in an article Veronica wrote for The Consulting Room on VAT misconceptions. In it, she points out that inadequate case notes are one of the most common reasons for HMRC disputes. "If you don’t keep adequate case notes, how will you prove to HMRC that you are providing medical care?" she asks. This underscores the necessity of making sure that all relevant details are captured in patient records, especially those concerning the medical purpose of the treatment.
In addition to services, aesthetic businesses must also be mindful of VAT implications on products and equipment. Veronica advises that the VAT treatment of products depends on how they are sold. "If a product is sold separately from a treatment, it is a taxable sale. However, if it is provided as part of an exempt medical treatment, it may also be exempt from VAT. The same product could be treated differently depending on the context in which it is sold," she explains.
Equipment purchases, particularly expensive items like lasers, can also complicate VAT accounting. Veronica notes, “The VAT on a piece of equipment can be recoverable if it is used solely for taxable cosmetic treatments. If it’s used for both taxable and exempt treatments, only a portion of the VAT can be recovered. Understanding the proportion of your sales that are taxable or exempt is crucial in determining how much VAT you can recover.”
Given the complexities and potential pitfalls associated with VAT in the aesthetic sector, Veronica strongly recommends working with a VAT specialist who understands the unique challenges of the industry. "It’s not enough to have a good accountant; you need one who is knowledgeable about VAT as it applies to aesthetic businesses. This will make sure that you are correctly interpreting VAT laws and not inadvertently falling into non-compliance," she advises.
Veronica’s guidance is particularly important in light of HMRC’s increased scrutiny of the sector. As she points out, "The aesthetic industry is subject to ongoing scrutiny by HMRC. It’s not a good idea to hide your head in the sand; you can still be seen! Not all accountants are comfortable advising on VAT, and some are not qualified to do so, so it’s crucial to take advice from a VAT specialist and set up your VAT accounting correctly from the outset."
Navigating VAT in the aesthetic sector may seem daunting, but the key to navigating it successfully is staying informed about VAT requirements and making sure you keep meticulous records.
As Veronica says, "VAT is on everything you do unless you can prove it’s exempt or zero rated. The onus is on the business to demonstrate that a treatment qualifies for exemption, and this requires more than just good intentions—it requires clear, documented evidence."
Working with specialised professionals can help you avoid costly mistakes and make sure you are compliant with HMRC regulations. By taking these steps, businesses can manage VAT risks effectively and focus on providing high-quality care to their clients.
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