Having been a VAT advisor for more than 30 years, including working within the HMRC and serving as chair of the VAT subcommittee for the Institute of Chartered Accountants for Scotland, there isn’t much Veronica Donnelly doesn’t know about VAT.
As a partner at Azets and head of the firm’s aesthetic sector advisory team, she has assisted clients with business improvement reviews and training, as well as advising on the requirement to provide evidence of medical services. She has also helped clients through HMRC VAT reviews, Code of Practice 8 and 9 enquiries, and alternative dispute resolution meetings and has instructed tribunal cases for aesthetic and medical clients. Veronica is a chartered tax advisor and associate of the Institute of Indirect Taxation and speaks regularly at aesthetic conferences regarding VAT accounting in the sector. Veronica has also contributed to two Hamilton Fraser guides for further reading, ‘A comprehensive guide to VAT in the cosmetic sector’ and ‘A comprehensive guide to finance, tax and VAT in aesthetics’.
At The Aesthetics Business Conference on Tuesday 8 October, Veronica will explain the current law and guidance as it affects aesthetic treatments, giving guidance on tests applied by both HMRC and the first-tier tribunals to allow VAT exemption to apply to medical procedures. She will advise on the evidence that needs to be retained to meet those tests and the risks for businesses that do not keep appropriate evidence of medical purpose. Here, we chat to her to find out more.
Q: Can you give us some insight into the focus of your talk at the Aesthetics Business Conference?
Veronica Donnelly: My talk will focus primarily on VAT as it pertains to the aesthetic sector. Over the past year, there have been several significant tribunal cases, and there's a lot of misinformation circulating about these cases. People often hear about these tribunals anecdotally and assume they’ve all been completely lost, which isn’t entirely accurate. I will talk about the current case law, the ongoing appeals, and what this all means for the sector. It’s important because the outcomes of these appeal cases could set precedents that affect the entire industry. I will also give some advice on how clinics should maintain record keeping because that's the key thing.
Key takeaways:
Q: Why is there so much confusion around VAT in the aesthetic sector?
Veronica Donnelly: The confusion largely stems from misunderstandings about what constitutes a VAT-exempt medical procedure versus a cosmetic one. The basic law hasn’t changed significantly since it was enacted in 1973. There was a one-word adjustment in 2007 where they changed the word “care” to “medical care”. That's it. However, the interpretation of what qualifies as a medical procedure has become increasingly contested. Businesses need to be clear on whether their services meet the VAT exemption tests—being on a medical register and providing medical care—and have the necessary evidence to support their claims.
It should be a very simple binary test. Qualifications are dead easy. Are you regulated? Are you not? What are you trained to do? You can actually deal with that very quickly.
The problem you then 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? There is case law, and that, again, is open to interpretation. That's the problem.
Q: What is the current status of the key tribunal cases, and why are they important?
Veronica Donnelly: There are two major cases in which permission to appeal has been granted. These cases will be heard by the Upper Tribunal, which is a court of record, meaning its decisions will apply 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. This will be a significant step forward for the industry.
Q: Can you summarise the key things people need to understand when it comes to VAT? What's the threshold? When do you need to be VAT registered, and should you register even if you haven't reached the threshold?
Veronica Donnelly: VAT, or Value Added Tax, applies to most goods and services unless they are specifically zero-rated, reduced-rated, or exempt. In the context of the aesthetic sector, the decision to register for VAT hinges on whether your business has made taxable supplies—essentially, supplies that are subject to VAT, which typically includes cosmetic treatments that don't qualify for medical VAT exemptions.
The VAT registration threshold is currently set at £90,000. If your taxable supplies exceed this threshold, you are legally required to register for VAT. However, even if you haven't reached the threshold, you can choose to register voluntarily. This voluntary registration can offer some protection—if you’re registered, the HMRC can normally only assess your VAT obligations for the past four years, as opposed to potentially many years if you were operating without registering.
A crucial point for businesses in this sector is to accurately determine whether their services qualify for VAT exemption. The burden of proof lies with the business to demonstrate that a service qualifies as exempt medical care. HMRC won’t assume exemption; it’s up to the taxpayer to provide evidence. This evidence should show that the treatment was carried out by someone on a medical register and that it was for the betterment of the patient's health.
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.
Additionally, it’s important to consider the implications of VAT registration on your business. If you decide to register now after years of trading, questions might arise as to why you weren’t registered earlier if you had been exceeding the threshold. This could lead to a more in-depth investigation by HMRC.
Q: What are some common mistakes that aesthetic businesses make regarding VAT?
Veronica Donnelly: A common mistake is assuming that entire categories of treatments are either fully taxable or fully exempt. The VAT liability is determined on a patient-by-patient basis. For example, Botox might be used to treat frown lines for cosmetic reasons in one patient, making it subject to VAT, while in another, it could be used to treat a medical condition like migraines, making it exempt. It's crucial to have detailed patient records that clearly justify the medical necessity of treatment if you're claiming an exemption.
Q: How should aesthetic businesses prepare for potential HMRC scrutiny?
Veronica Donnelly: 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.
Q: With all the complexities involved, should businesses in the aesthetic sector work with specialised accountants or advisors?
Veronica Donnelly: Absolutely. Many business owners might choose an accountant based on recommendations from friends, but it’s crucial to also make sure the accountant understands the unique challenges of the aesthetic sector. General business accountants might not be familiar with the nuances of VAT as it applies to medical versus cosmetic procedures, which can lead to costly mistakes. Preparation is key—getting the right advice from the start can save a lot of headaches down the line.
Q: What advice do you have for businesses while waiting for the results of these appeals?
Veronica Donnelly: HMRC has a focused team that is actively working in the aesthetic sector. Businesses need to be prepared to demonstrate their compliance with VAT regulations confidently and clearly. My advice is to maintain stringent record-keeping and be realistic about what treatments you classify as VAT-exempt. The appeals won’t be resolved quickly, and HMRC will continue to conduct audits and issue assessments in the meantime. Businesses need to make sure they are fully prepared to defend their VAT positions if challenged.
I think sometimes people view this as some form of VAT planning structure. I'm not in the business of taking people down that route. This is about the correct application of the law and businesses can do very well getting it right.
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