VAT and medical services

In recent years, the healthcare sector has been through a period of technological change, driven by advancements in research, development, and innovation. From wearable health monitors to cutting-edge surgical equipment, the landscape of medical technology is rapidly evolving. However, these advancements in medical technology come alongside the need for healthcare providers to navigate complex VAT legislation, most of which was written 50 years ago, and which determines the VAT treatment of their supplies. Getting this wrong can lead to unexpected and significant VAT costs arising.

The advancements in medical technology, along with the additional challenges that may arise from a UK VAT perspective, can be exampled through one of our recent clients, who introduced a new piece of wearable technology to be used for the diagnosis of certain medical conditions on individuals. We cover a case study where a client sought our advice on the correct VAT treatment of the services supplied, and how to best manage their UK VAT position going forward.

VAT analysis

The default position is that services provided by UK businesses to UK established customers are subject to the standard rate of VAT (currently 20%) unless there is an exception which allows a different rate of VAT to apply. The provision of medical services is generally exempt for VAT purposes (i.e. not subject to VAT), but the application of the medical exemption is a source of regular dispute with HM Revenue and Customs (the UK tax authority), who seeks to apply this exemption narrowly.

The financial consequences of either charging VAT at the standard rate of 20%, or with the exemption applying, are likely to be significant. Although at first sight it may appear beneficial for the services not to attract VAT, VAT cannot be recovered on associated expenditure where the services are exempt. As such, it is important for all providers of medical services to determine whether or not their supplies fall within the medical exemption, or are instead taxable at the standard rate of VAT.

Under the relevant part of the legislation, there are two main conditions that must be satisfied in order for the medical exemption to apply.

1. The services should be performed by someone who is registered/ enrolled on a specified medical register.
2. The principal aim of the services should be the maintenance, protection or restoration of human health.

Medical supplies of items that are not primarily intended for medical purposes, such as cosmetic procedures, are typically subject to the standard rate of VAT.

The application to our client

Following a review of our client’s activities, along with an analysis of the UK VAT legislation and case law, it was determined that its supplies did not fall within the medical exemption and were instead taxable at the standard rate of UK VAT at 20% when supplied to UK established customers.

The reason for this is that its employees were not registered under the relevant medical registers in the UK, thus not satisfying condition 1 of the medical exemption. Furthermore, our client was only providing a supply of data obtained by its equipment, rather than providing any actual diagnostic work. Its supplies therefore did not meet condition 2 of the medical exemption and it is therefore required to charge VAT at a rate of 20% on all its supplies to UK established customers.

Additional considerations

Our client was previously not registered for VAT in the UK. However, as it now has to charge an additional 20% of VAT on its sales, it is therefore required to register for VAT in the UK and obtain a UK VAT registration number in order to do so. There are several other factors it must now also consider because of this. Businesses that only provide standard rated supplies are regarded as being ‘fully taxable’, and therefore have the right to recover all of the VAT they incur on their costs, subject to the usual rules.

Furthermore, our client receives services from suppliers based outside of the UK. The VAT on these services will need to be accounted for under the reverse charge mechanism, and our client therefore must self-account for VAT at 20% on the value of this charge and include this value in both box 1 (output tax) and box 4 (input tax) of its VAT returns – this is a requirement for all VAT registered businesses (including businesses that only provide exempt supplies) receiving certain services from overseas supplies. As our client’s supplies are fully taxable (as opposed to exempt), the VAT charged under the reverse charge would be simultaneously recoverable on the VAT return and therefore does not result in an additional VAT cost. Our client is therefore in a better position than it would be if its supplies were exempt as, if so, it would only be able to recover a proportion of the VAT it is required to account for under the reverse charge.

Along with this, our client also imports goods from outside the UK into the UK. The importer of record of these goods is required to account for any import VAT and customs duty that is charged in the UK. As such, any import VAT that is incurred as a result of this can also be recovered on its quarterly VAT returns, assuming it is named as the importer of record on these imports, and they are used for the purposes of its business.

It is therefore clear to see that navigating the VAT law on supplies of medical technology, along with the additional VAT considerations as a result, can be complex, requiring careful consideration of regulatory requirements and tax regulations. Companies operating in this space must ensure compliance with the VAT rules to avoid any potential penalties imposed by HM Revenue and Customs.

In summary

The increase in the supply of medical technology presents exciting opportunities for improving healthcare outcomes and driving innovation in the UK. However, navigating the VAT implications of this growth is essential for both businesses and consumers. By understanding the VAT treatment of medical devices and services, stakeholders can ensure compliance with tax regulations while maximising the benefits of technological advancements in healthcare. As the medical technology landscape continues to evolve, staying on top of the frequent changes in VAT regulations will be crucial for a business’ success in this sector.

If you would like to discuss this further, please get in touch with Rob Janering, or your usual Crowe contact.