Category Archives: VAT Exemption

What is outside the scope of VAT, and what does it mean?

By   10 January 2025
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Put simply, income which is outside the scope (OSC) of VAT is UK VAT free. It means that either there has been no supply in respect of that income (non-business, or ‘NB’), or if there is, it has a place of supply (POS) which is outside the UK. Although VAT free, OSC is distinct from exempt or zero-rated supplies and has a different impact for the entity involved in NB activities.

So, here I consider the different types of OSC income and how it affects the VAT position of the recipient of such a payment.

Charity

Charities and NFP organisations often receive income from various sources and often receive NB income which is OSC. This income is often donations for which the donor does not receive anything (there is no consideration provided by the charity). An organisation such as a charity that is run on a non-profit-making basis may still be regarded as carrying on a business activity for VAT purposes. This is unaffected by the fact that the activity is performed for the benefit of the community. It is therefore important for a charity to determine whether particular transactions are business or NB activities. This applies both when considering registration (if there is only NB activity a charity cannot be registered and therefore cannot recover any input tax) and after registration. ‘Business’ has a wide meaning for VAT purposes – an activity may still be business if the amount charged does no more than cover the cost to the charity of making the supply or where the charge made is less than cost. If the charity makes no charge at all the activity is unlikely to be considered business. A common area of complexity for charities when considering whether their activities are in the course of business is receipt of grant funding (please see below).

Grants 

There is no ‘standard’ VAT treatment of grants. The VAT outcome depends on the precise facts of each specific agreement. The most important test is whether the grantor receives any consideration in return for the payment. It may be that the donor recognises the good work a body does and wishes to contribute (akin to a donation) which is OSC. Alternatively, the recipient of the grant may be obliged to provide something in return (a supply which is not OSC). A helpful way of looking at this is to consider, not what the recipient does with grant money, but what it does for it.

Inter-company charges

Charges between VAT group members are OSC. Moreover, charges between non-VAT-grouped companies may also be OSC. These are commonly called ‘management charges’ and the VAT treatment depends on a number of facts. It is often the case that a management charge is used as a mechanism for transferring “value” from one company to another. If it is done in an arbitrary manner with no written agreement in place, and nothing identifiable is provided the income is likely to be OSC. Otherwise, it is likely to be a taxable supply. What is important is not how a management charge is calculated, but what the supply actually is (if it is one). The calculation, whether based on a simple pro-rata amount between separate subsidiaries, or via a complex mechanism set out in a written agreement has no impact on the VAT treatment. As always in VAT, the basic question is: what is actually provided? 

Place of supply not the UK

If the POS is outside the UK, then the resulting payment for that supply is OSC. The POS rules can be complex and care must be taken in identifying the correct country to declare output tax (this may include the use of the OSS). In some instances, the Reverse Charge is applied. Input tax incurred in relation these supplies is recoverable, subject to the normal rules, and this distinguishes this type of supply from some of the others discussed here.

Transfer Of a Going Concern (TOGC) 

A TOGC is deemed to be neither a supply of goods nor services, so consequently, it is OSC. Input tax incurred in respect of the costs of making a TOGC are considered an overhead of the business for partial exemption purposes, so it is not automatically disallowed because it relates to a ‘non-supply’.

Supplies by a non-taxable person

Sales by a business person who is not liable to be VAT registered.

Insurance etc

A payment between persons, which is paid under a contract of indemnity, is OSC, because it does not represent consideration for a supply, eg; sums paid under an insurance policy.

Private transactions

These transactions between individuals or gifts received are OSC.

Statutory fees

These are OSC, an example of such fees are: the London congestion charge, MOT testing, some road tolls, and parking fines.

Input tax recovery 

VAT incurred on costs directly relating to OSC activities is not input tax and cannot be recovered (there are no de minimis limits). This is separate to partial exemption and a business/NB calculation is required before a partial exemption calculation is carried out, so it is a two-tier exercise. It may be possible to combine these two calculations, but that is an article for another day.

HMRC has issued new guidance on the amount of input tax claimable when an element is attributable to NB activities. If an entity is involved in both business and NB activities, eg; a charity which provides free advice and also has a shop which sells donated goods, it is unable to recover all of the VAT it incurs.  VAT attributable to NB activities is not input tax and cannot be reclaimed.  Therefore, it is necessary to calculate the quantum of VAT attributable to business and NB activities. That VAT which cannot be directly attributed is called overhead VAT and must be apportioned between business and NB activities.  There are many varied ways of doing this as the VAT legislation does not specify any particular method.  It is important to consider all of the available alternatives. Examples of these are; income, expenditure, time, floorspace, transaction count etc (similar to those methods available for partial exemption calculations). Any calculation must be fair and reasonable.

Overall

OSC income should not be recognised in the value box of VAT returns and it does not count towards the VAT registration limit. It is likely to negatively affect the recipient’s input tax recovery position. The distinction between business and non-business is crucial and will significantly impact on an entity’s overall VAT position.

Further reading

The following articles consider case law and other relevant business/NB issues:

Wakefield College

Longbridge

Babylon Farm

A Shoot

Y4 Express

Lajvér Meliorációs Nonprofit Kft. and Lajvér Csapadékvízrendezési Nonprofit Kft

Healthwatch Hampshire CIC 

Pertempts Limited

Northumbria Healthcare

New HMRC publications: VAT on cladding remediation work

By   6 January 2025
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In the aftermath of the horrific Grenfell fire, a lot of buildings require unsafe cladding to be replaced.

A new Brief clarifies HMRC’s policy on the deduction of VAT incurred on cladding remediation works which are carried out on existing residential buildings. It sets out:

  • the reason VAT costs are incurred when carrying out remediation works to residential buildings with fire and safety defects
  • the circumstances in which the VAT incurred in providing remediation works can be recovered

Broadly, the distinction is whether the work qualifies as snagging. If it does, the VAT treatment follows the liability of the original building work – zero rated if the original construction was of a zero-rated new residential building, ie; they are supplied in the course of construction of a qualifying building.

If not snagging, the remedial work will be standard rated.

If the work is standard rated, it may be recoverable by the recipient in certain circumstances.

Snagging

HMRC’s definition of snagging is “the carrying out of remedial works to correct faulty workmanship or replace faulty materials”.  Normally, it is carried out by the original developer under the terms of the original contract. This means it is not seen as a separate supply of construction services. Snagging covers faults that are:

  • found soon after the building is completed
  • still covered by the building contract

More details on snagging here.

Furthermore, HMRC has published Guidelines for Compliance GfC11. This guidance covers HMRC’s existing policy on the VAT treatment of remedial works and includes:

  • the definition of snagging
  • an explanation of when you can recover input tax
  • examples to help you work out the VAT treatment of remedial works
  • examples of documents and evidence you should keep
  • information about correcting a submitted return

HMRC state that its policy has not changed.

How to apply for a VAT Partial Exemption Special Method

By   6 January 2025
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Partial Exemption

Businesses which makes exempt supplies may be partially exempt (depending on the de minimis limits). A partially exempt business will be prohibited from claiming all of its input tax. A calculation is required to determine the amount of a claim which is blocked. The majority of businesses use what is known as “the standard method” with an annual adjustment.

Partial Exemption Special Method (PESM)

However, use of the standard method is not mandatory and a business can use a “special method” (a Partial Exemption Special Method, or PESM) that suits a business’ activities better. Any PESM has to be “fair and reasonable” and it has to be agreed with HMRC in advance. When using a PESM no rounding of the percentage is permitted and it has to be applied to two decimal places.

HMRC says fair and reasonable means it must be:

  • robust, in that it can cope with reasonably foreseeable changes in business
  • unambiguous, in that it can deal, definitively with all input tax likely to be incurred
  • operable, in that the business can apply it without undue difficulty
  • auditable, in that HMRC can check it without undue difficulty
  • fair, in that it reflects the economic use of costs in making taxable and exempt supplies

Types of PESMs

The following are examples of special methods:

  • sectors and sub-sectors
  • multi pot
  • time spent
  • headcount
  • values
  • number of transactions
  • floor space
  • cost accounting system
  • pro-rata
  • combinations of the above methods

How to apply

You will need to provide documents with your application. These include:

More information on the documentation a business needs provide is set out in Appendix 2 of PN706  

Apply online

You will need to either:

  • sign in with your Government Gateway user ID and password (if you do not have a user ID, you can create one when you first try to sign in)
  • use your email address to get a confirmation code that you can use to sign in

This is done here

A glossary of partial exemption terms may be found here.

VAT: Updated HMRC guidance on exemption for healthcare supplies

By   23 December 2024
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HMRC has published new guidance in its internal manual VATHLT2035.

It covers the services of the medical and paramedical professions: Anaesthesia Associates and Physician Associates.

Regulation for Anaesthesia Associates (AAs) and Physician Associates (PAs) came into effect on 13 December 2024. A full registration is required by December 2026. The exemption will only apply to the AAs and PAs that have joined from the date of registration.

Anaesthesia Associates

AAs are specialised practitioners trained to perform certain medical procedures related to anaesthesia under the supervision of qualified medical personnel. They are not doctors but play a crucial role in the healthcare system by assisting in the administration of anaesthesia and monitoring patients during surgical procedures. AAs are authorised to perform specific procedures they are trained and approved for. They will be regulated by the General Medical Council (GMC). Their services will be exempt from VAT, provided they are carried out for the purpose of medical care.

Physician Associates

PAs are healthcare professionals who support doctors in diagnosing and managing patients. They are trained to perform various medical procedures and provide care under the supervision of doctors. PAs are not doctors but are essential members of the multidisciplinary healthcare team, enhancing the capacity of healthcare services. They are meant to supplement, not replace, the role of doctors. Their services will be exempt from VAT, provided they are carried out for the purpose of medical care.

The exemption is via The VAT Act 1994, Schedule 9, Group 7.

VAT: Pre-registration activities

By   2 October 2024
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This article looks at the period of activity before a business VAT registers: How to deal with sales and what input tax may be recovered.

VAT Registration

The obligation to VAT register here and the pros and cons of voluntary registration here.

Sales

Between application and receiving a VAT number:

During the wait, a business cannot charge or show VAT on its invoices until it receives a VAT number. However, it will still be required to pay the VAT to HMRC for this period. Usually, a business will increase its prices to allow for this and tell its customers why. Once a VAT number is received, the business can then reissue the relevant invoices showing VAT.

Purchases

Purchases made before registration:

Only the legal entity which actually purchased the goods or services and has applied to VAT register is entitled to input tax recovery.

There are time limits for backdating claims for input tax incurred before registration. These are:

  • four years for goods on hand at the time of the Effective Date of Registration (EDR), or that were used to make other goods on hand at the EDR. This includes both stock for resale or fixed assets
  • six months for services

Input tax can only be reclaimed if the pre-registration expenditure related to the taxable supplies made, or to be made, by the newly VAT registered business (whether these supplies are subject to subsequent output tax or whether they were made pre-registration but would have been taxable if the business was VAT registered).

The only VAT return on which such input tax is recoverable is the first.

Tip

When a business applies for registration, there is an opportunity to backdate the EDR. The provision for taxpayers to negotiate an earlier date is contained in The VAT Act 1994, Schedule 1, 9. This option should be considered if there is additional VAT that would become recoverable. This will mean that the first return will be longer than the normal quarterly or monthly returns.

The limit for backdating EDR is four years.

Irrecoverable VAT

Input tax cannot be reclaimed on:

  • goods that have been completely consumed before registration, eg; fuel, electricity or gas
  • goods that have been sold before registration
  • goods or services which relate to exempt supplies made, or to be made, by the registered business (see below)
  • services which related to goods disposed of before registration

NB: Businesses are not required to reduce the VAT deducted in respect of pre-registration use of fixed assets. Eg; input tax incurred on a van purchased three years before registration and used before and after registration would be recoverable in full.

The “usual” rules for input tax also apply to pre-registration claims; that is, some VAT is never reclaimable, see here.

Specific circumstances

There are special rules for partially exempt businesses and for businesses that have non-business income and for the purchase of certain items (see below) covered by the Capital Goods Scheme (CGS).

Included in the CGS are:

  • taxable land, property purchases of £250,000 or over
  • refurbishment or civil engineering works costing £250,000 or over
  • computer hardware costing £50,000 or over (single items, not networks)
  • aircraft, ships, and other vessels costing £50,000 or more

NB: The partial exemption de minimis limit does not apply to input tax incurred pre-registration.

Pre-incorporation

A limited company cannot register for VAT until it is formally incorporated. Goods or services may have been supplied to the directors or employees setting up the company before then.

A company can claim input tax on those goods and services if the it relates directly to the taxable business to be carried on by it following incorporation and registration for VAT. The six-month (services) four-year (goods) limits also apply to pre-incorporation claims.

Documentation

Any claim must be supported by a valid VAT invoice for each item. If this documentation is not available, there is a possibility that HMRC will accept alternative evidence.

Legislation

The right to deduct input tax as above is covered by The VAT general Regulations 1995, reg 111.

What VAT CAN’T you claim?

By   12 August 2024
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VAT Basics
The majority of input tax incurred by most VAT registered businesses may be recovered. However, there is some input tax that may not be. I thought it would be helpful if I pulled together all of these categories in one place:

Blocked VAT claims – an overview

  • No supporting evidence

In most cases this evidence will be an invoice (or as the rules state “a proper tax invoice”) although it may be import, self-billing or other documentation in specific circumstances. A claim is invalid without the correct paperwork. HMRC mayaccept alternative evidence, however, they are not duty bound to do so (and rarely do unless the amount is minimal). So ensure that you always obtain and retain the correct documentation.

  • Incorrect supporting evidence

Usually this is an invalid invoice, or using a delivery note/statement/pro forma in place of a proper tax invoice. To support a claim an invoice must show all the information set out in the legislation. HMRC are within their rights to disallow a claim if any of the details are missing.

  •  Input tax relating to exempt supplies

Broadly speaking, if a business incurs VAT in respect of exempt supplies it cannot recover it. If a business makes only exempt supplies it cannot even register for VAT. There is a certain easement called de minimis which provide for recovery if the input tax is below certain prescribed limits. Input tax which relates to both exempt and taxable activities must be apportioned. More details of partial exemption may be found here.

  •  Input tax relating to non-business activities

If a charity or NFP entity incurs input tax in connection with non-business activities this cannot be recovered and there is no de minimis relief. Input tax which relates to both business and non-business activities must be apportioned. Business versus non-business apportionment must be carried out first and then any partial exemption calculation for the business element if appropriate. More details here

  •  Time barred

If input tax is not reclaimed within four years of it being incurred, the capping provisions apply and any claim will be rejected by HMRC.

  •  VAT incurred on business entertainment

This is always irrecoverable unless the client or customer being entertained belongs overseas. The input tax incurred on staff entertainment costs is however recoverable. A flowchart for recoverability in this area here.

  •  Car purchase

In most cases the VAT incurred on the purchase of a car is blocked. The only exceptions are for when the car; is part of the stock in trade of a motor manufacturer or dealer, or is used primarily for the purposes of taxi hire; self-drive hire or driving instruction; or is used exclusively for a business purpose and is not made available for private use. This last category is notoriously difficult to prove to HMRC and the evidence to support this must be very good.

  •  Car leasing

If a business leases a car for business purposes it will normally be unable to recover 50% of the VAT charged.  The 50% block is to cover the private use of the car.

  • Fuel costs

The element of fuel costs used for personal use is blocked. There are three ways to treat input tax on fuel:

    • claim 100% of the VAT charged. This is possible if fuel is bought for business motoring only or for both business and private motoring and the appropriate road fuel scale charge is applied on the value of supplies of fuel for private use
    • use detailed mileage records to separate business mileage from private mileage and only claim for the business element
    • claim no input tax
  •  A business using certain schemes

For instance, a business using the Flat Rate Scheme cannot recover input tax except for certain large capital purchases, also there are certain blocks for recovery on for Tour Operators’ Margin Scheme (TOMS) users

  •  VAT charged in error

Even if a business obtains an invoice purporting to show a VAT amount, this cannot be recovered if the VAT was charged in error; either completely inappropriately or at the wrong rate. A business’ recourse is with the supplier and not HMRC.

  •  Goods and services not used for a business

Even if a business has an invoice addressed to it and the services or goods are paid for by the business, the input tax on the purchase is blocked if the supply is not for that business’ use. This may be because the purchase is for personal use, or by another business or for purposes not related to the claimant business.

This is not input tax and therefore is not claimable. However, there are exceptions for goods on hand at registration and which were purchased within four years of registration, and services received within six months of registration if certain conditions are met.

  •  VAT incurred by property developers

Input tax incurred on certain articles that are installed in buildings which are sold or leased at the zero rate is blocked.

  •  Second hand goods

Goods sold to a business under one of the VAT second-hand schemes will not show a separate VAT charge and no input tax is recoverable on these goods.

  •  Transfer of a going concern (TOGC)

Assets of a business transferred to you as a going concern are not deemed to be a supply for VAT purposes and consequently, there is no VAT chargeable and therefore no input tax to recover.

  •  Disbursements

A business cannot reclaim VAT when it pays for goods or services to be supplied directly to its client. However, in this situation the VAT may be claimable by the client if they are VAT registered. For more on disbursements see here.

  •  VAT incurred overseas

A business cannot reclaim VAT charged on goods or services that it has bought from suppliers in other EU States. Only UK VAT may be claimed on a UK VAT return. There is however, a mechanism available to claim this VAT back from the relevant authorities in those States. Details here. However, in most cases, supplies received from overseas suppliers are VAT free, so it is usually worth checking whether any VAT has been charged correctly.

  • Business assets of £50,000 and more

There are special rules for reclaiming input tax using the Capital Goods Scheme, which means a business must spread the initial VAT claimed over a number of years.

VAT – Understanding land and property issues

By   8 July 2024
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Help!

Supplies relating to property may be, or have been; 20%, 17.5%, 15.%, 10% 5%, zero-rated, exempt, or outside the scope of VAT – all impacting, in different ways, upon the VAT position of a supplier and customer. In addition, the law permits certain exempt supplies to be changed to 20% without the agreement of the customer. As soon as a taxpayer is provided with a choice, there is a chance of making the wrong one! Even very slight differences in circumstances may result in a different and potentially unexpected VAT outcome, and it is an unfortunate fact of business life that VAT cannot be ignored.

Why is VAT important?

The fact that the rules are complex, ever-changing, and the amounts involved in property transactions are usually high means that there is an increased risk of making errors. This is increased by the fact that these are often one-off transactions by a business, and in-house, in depth tax knowledge is sometimes absent. Such activities can result in large penalties and interest payments, plus unwanted attentions from VAT inspectors. Uncertainty regarding VAT may affect budgets and an unforeseen VAT bill (and additional SDLT) may risk the profitability of a venture.

Problem areas

Certain transactions tend to create more VAT issues than others. These include;

  • whether a property sale can qualify as a VAT free Transfer Of a Going Concern (TOGC)
  • conversions of properties from commercial to residential use
  • whether to opt to tax (OTT) a commercial property
  • the recovery of VAT charged on a property purchase
  • supplies between landlord and tenants
  • the Capital Goods Scheme (CGS)
  • the anti-avoidance rules
  • mixed developments
  • apportionment of VAT rates
  • changes in number of dwellings in a building(s)
  • changes in intention of use of a building
  • sale of partially completed developments
  • partial exemption
  • charity use
  • non-business use
  • relevant residential use
  • the place of supply (POS) of services
  • holiday lets
  • serviced apartments
  • contracts
  • new build residential
  • DIY Housebuilders
  • tax points (time of supply)
  • HMRC queries
  • deposits
  • and even seemingly straightforward: VAT registration

Additionally, the VAT treatment of building services throws up its own set of VAT complications.

The above are just examples and the list is not exhaustive.

VAT Planning

The usual adage is “right tax, right time”. This, more often than not, means considering the VAT treatment of a transaction well in advance of that transaction taking place. Unfortunately, with VAT there is usually very little planning that can be done after the event. For peace of mind a consultation with a VAT adviser can steer you through the complexities and, if there are issues, to minimise the impact of VAT on a project. Assistance of a VAT adviser is usually crucial if there are any disputes with VAT inspectors. Experience insists that this is an area which HMRC have raised significant revenue from penalties and interest where taxpayers get it wrong.

Don’t leave it to chance!

For more information, please see our Land & Property services

VAT: What is an exempt supply, and what does it mean?

By   17 June 2024
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VAT Basics

Exemption generally

Some services are exempt from VAT. If all the services a business provides are exempt, it will not be able to register for VAT, which means it cannot reclaim any input tax incurred on its purchases or expenses.

If a business is VAT registered it may make both taxable and exempt supplies (it will need to make at least some taxable supplies to be registered). Such a business is classed as partly exempt and it may be able to recover some input tax, but usually not all (Please see de minimis below).

Types of supply which may be exempt

Examples are:

The above list is not exhaustive.

* Most businesses which do not routinely make exempt supplies usually encounter exemption in the area of land and property and it is an easy trap to fall into not to consider VAT when involved in property transactions. This is one area where VAT planning may be of assistance as it is possible in most situations to deliberately choose to add VAT to an exempt supply to avoid a loss of input tax.  This is known as the option to tax, and it is considered in more detail here.

The legislation covering exemption is found at The VAT Act 1994, Schedule 9. 

What does exemption mean?

 An entity only making exempt supplies cannot register for VAT and consequently has no VAT responsibilities or obligations. While this may seem attractive, exemption is often a burden rather than a relief. This is because any VAT it incurs on any expenditure is irrecoverable and represents an additional cost.  This often affects charities, although there are some limited reliefs.

Exempt supplies are completely different to non-business activities, although the VAT outcome is often similar.

 Partial exemption de-minimis

A partly exempt business cannot usually recover all of the input tax it incurs. However, there is a relief called de minimis. Broadly, if VAT bearing expenditure is below certain limits in may be recovered in full. These are provisional calculations and are subject to a Partial Exemption Annual Adjustment.

Further information on terms used in partial exemption here.

VAT: Education – what, precisely, is exempt?

By   17 June 2024
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In my experience, there is a general assumption that all “education’ is exempt. It is true to say that a lot of education and tuition is indeed exempt, but that is not automatically the case. It is important to establish the reason for the application of non-taxable treatment. The VAT treatment depends on; what is actually being provided, who is providing it and the precise arrangements. I consider the more common issues below.

The legislation covering education is VAT Act 1994, Schedule 9, Group 6.

What does the term education mean?

It means a course, class or lesson of instruction or study in a subject. This includes:

  • lectures
  • educational seminars
  • conferences and symposia
  • recreational and sporting courses
  • distance teaching and associated materials

Schools etc

The first type of education exemption is relatively clear: It is the provision of education by an eligible body. An eligible body is, broadly; a school, college, or university (supplies by Local Authority schools, city technology colleges, sixth form colleges, academies and free schools – where education is provided for no charge, are non-business activities rather than exempt, and have their own set of rules). More on academies here

It is also worth noting that any ‘closely related” goods or services provided with exempt education are themselves exempt. This may cover items such as; certain stationery, accommodation, transport and catering.

There is usually very little disagreement about the VAT treatment of these entities.

Charities/ non-profit making organisations

If a charity/NFP entity is an eligible body supplies of education and vocational training (see below) by it are exempt. Such an organisation is likely to be an eligible body, where it’s a charity, professional body or company which:

  • cannot and does not distribute any profit it makes, and
  • any profit that does arise from its supplies of education is used solely for the continuation or improvement of such supplies.

There can be disputes over the term “does not distribute any profit” so care should be taken in this respect and advice sought if there is any doubt.

Tuition

Exemption applies to the supply of “private tuition, in a subject ordinarily taught in a school or university, by an individual teacher acting independently of an employer” – VAT Act 1994 Schedule 9, Group 6, item 2.

Taking each of these tests in turn:

  • What is “private tuition?

In order to qualify, the provider of tuition must act independently and not be an employee. Practically, this means that the person providing the tuition must either be a sole proprietor, a partner in a partnership, or a member of a Limited Liability partnership (LLP). Consequently, exemption does not apply if the teaching is carried out by a company or an employee. This is a matter of fact, however, it is possible to structure matters such that the exemption applies if it does not currently (and the restructure is possible commercially).

  • What does “ordinarily taught” in schools/universities mean?

This is often a moot issue and the significant amount of case law highlights this. Most of the mainstream subjects are covered of course, but what about subjects like; golf, horse riding and dance? Would they be ordinarily taught in schools? (The answer according to case law is; yes). However, there are many other subjects which are debatable and HMRC usually take an uncompromising line on this area, especially around sporting activities. If there is any doubt, we recommend seeking advice.

  • What does tuition mean?

Clearly, if a person teaches or coaches a subject to an individual or group, then this qualifies as tuition. However, a distinction must be made between this and a recreational type of activity which may be called a “class”, but no actual tuition is provided. Exemption does not apply, for example, for the simple provision of gymnasium or swimming pool facilities, or a yoga class where no coaching takes place (however, it is possible that these may be exempt under different parts of the legislation, but that is not the subject of this article).

Vocational training

Vocational training means training or re-training and work experience for paid employment or voluntary employment in areas beneficial to the community.

If vocational training is provided for a charge the VAT consequences are either:

  • for an eligible body (see above) vocational training is exempt
  • for a non-eligible body vocational training is still exempt to the extent that it is funded under an approved government funding scheme. Otherwise the supply is taxable.

English as a Foreign Language (EFL)

If a commercial entity makes supplies of tuition of EFL they will qualify for exemption. In these cases, tuition includes all elements that are integral to the course, held out for sale as such, and are the means by which it is intended to promote fluency in the use of the English language.

General

In respect of all of the above, if exemption does not apply the supply of education falls to be taxable as a default.

For completeness, exemption may also apply to; research, examination services, youth clubs, day nurseries, crèches and playgroups but these activities are outside the scope of this article.

Summary

There are many traps for the unwary here. Planning is always advisable and I recommend that any entity which provides education is conscious of the VAT implications and seeks advice where/when necessary.

VAT: Are cosmetic skin treatments exempt medical care? The Skin Science case

By   8 May 2024
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Latest from the courts

In the First Tier Tribunal (FTT) case of Gillian Graham T/A Skin Science the issue was whether certain cosmetic skin treatments were exempt via The VAT Act 1994, Schedule 9, Group 7, item 1 which covers services for the primary purpose of protecting, restoring or maintaining health: “medical care”                                                                  

Were the services provided by Skin Science (SS) medical care?

Background

SS ran a clinic at 10 Harley Street, London and Ms Graham was a Registered General Nurse (RGN).

As an RGN the Appellant must submit revalidation every three years to the Nursing & Midwifery Council. The revalidation process requires her to demonstrate evidence of the scope of her professional practice including; evidence of hours worked, case studies, discussions with other medical professionals to obtain feedback and attending training courses. The Appellant’s realm of practice is disorders of the skin.

Patients generally attend the Appellant’s clinic by choice and are not referred to the Appellant by a doctor or psychologist. Some clients might see the Appellant following referrals from beauticians who may be unable to carry out treatments for certain conditions.

The treatments that the Appellant provides to her patients are not generally part of a treatment plan which involves other health professionals. SS could not confirm whether psychiatrists, psychological professionals or doctors would prescribe fillers or toxin for the conditions that she diagnoses.

A range of treatments were provided, including:

  • Restylane
  • Pix Cannula
  • Teosyal light filling
  • Muscle relaxing injections
  • Dermal roller
  • Glycolic Acid Peel
  • TCA Peel
  • Botox
  • Belotero Volume
  • Dermal fillers
  • Face lift by injection
  • Hollywood Eye Magic Serum
  • Belotero injections

SS provided a description of each treatment to the Tribunal.

The appellant also prescribed medicines such as; Lidocaine, Botulinum, Scleremo, Zinerate and Tretinoin.

Contentions

SS argued that the supplies of skin care treatments are exempt from VAT as they are supplies of medical care. She diagnoses recognised medical conditions, provides treatment to address those conditions and is fully qualified to do so. As all of her treatments are aimed at treating or curing those recognised medical conditions, they inevitably have a therapeutic purpose. Although they may improve the appearance of the patients and in some cases be regarded as inherently cosmetic, this is consequential as the primary purpose is to address an underlying medical condition whether physical or psychological or both. Moreover, purpose should be determined by a medical professional and not by HMRC.

HMRC contended that these supplies were standard rated (causing SS to become VAT registered) as they did not have the primary purpose of protecting, restoring or maintaining health as they were overwhelmingly cosmetic and so do not satisfy the requirements of the exemption.

Decision

It was noted that the concept of the “provision of medical care” does not include medical interventions carried out for a purpose other than that of diagnosing, treating and in so far as possible, curing diseases or health disorders and it is the purpose of the medical intervention rather than merely the qualifications of the person providing it that is key.

Health problems may be psychological, they are not limited to physical problems. Where treatment is for purely cosmetic reasons it cannot be within the exemption. Where, however, the purpose of the treatment is to treat or provide care for persons who as a result of illness, injury or a congenital physical impairment are in need of plastic surgery or other cosmetic treatment then this may fall within the concept of medical care.

The Appellant is not a psychological professional under Item 1(c) of Group 7 (health professionals) or a psychiatrist under Item 1(a) (medical practitioners), so the focus must be on what is within the scope of an RGN’s profession. The judge found that the Appellant had not proven her case that diagnosing and treating conditions which are psychological is within the scope of her profession as an RGN.

The decision was that the treatments were not for the primary purpose of protecting, restoring or maintaining health and so not “medical care” and consequently the appeal was dismissed.

A parallel outcome to a similar case in the Skin Clinics Ltd case. Other cases on medical exemption here, here and here.

Commentary

There has been an ongoing debate as to what constitutes medical care. Over 20 years ago I was advising a large London clinic on this very point and much turned on whether patients’ mental health was improved by undergoing what many would regard as cosmetic procedures. We were somewhat handicapped in our arguments by the fact that many of the patients were lap dancers undergoing breast augmentation on the direction of the owner of the club…

It is crucial to apply the above tests to any medical services to determine whether they come within the exemption.

It is worth remembering that not all services provided by a medically registered practitioner are exempt. The question of whether the medical care exemption is engaged in any given case will turn on the particular facts.