Ian Tongue presents a recap on Value-Added Tax (VAT) and how this may affect your private practice.
VAT is a tax we are all familiar with, as it is paid on the majority of the goods and services we buy.
Sometimes an invoice will separate out VAT, but in much of our day-to-day expenditure the price we pay is inclusive of VAT, particularly in the retail world.
When running a business, it is normal to have to be VAT-registered, but within the medical profession it is less common for private practices.
The reason for this is that medical services are usually exempt from VAT, meaning that VAT does not need to be considered. But there are some exceptions which this article considers further.
VAT registration can be compulsory by law or on a voluntary basis for the smaller business.
For compulsory registration, you have to be making VAT-able supplies in excess of £85,000. However, for voluntary registration, there is no minimum, but you have to be making taxable supplies.
Taxable supplies are supplies (sales/fees) that are subject to VAT. VAT is usually charged at 20%, but there are lower rates and even a zero rate where VAT is charged but at 0%.
New house building is an example of a zero-rated activity whereby VAT is charged at 0% when you buy the property, but the builder can claim back the VAT suffered on the build costs.
For private practices, it is rare to register voluntarily and those medics who are registered have done so, as the compulsory registration limit has been reached.
The process of looking at your supplies is very important, as this determines your VAT status and whether you have any compulsory obligations.
Another key factor is that you are required to consider VAT registration monthly by looking back 12 months each time and determine whether you have breached the registration threshold cumulatively in that 12-month period.
Supplies of medical services are generally exempt from VAT, meaning that you could have a high income but, as your supplies are exempt, you will not breach the £85,000 compulsory VAT registration threshold.
In order to treat your supplies as medical, you must meet all of the following criteria:
- Be a registered health professional;
- Provide services within the profession in which you are registered to practice;
- The primary purpose of the services is the protection, maintenance or restoration of the health of the person concerned.
The vast majority of clinical medical services carried out by consultants and GPs satisfies the above criteria.
The most common areas where the above is not met is medico- legal work and purely cosmetic procedures.
This type of work is common for consultants and, under the VAT legislation, is not regarded as a supply of medical services.
The reason for this is that the primary purpose of the work is not the protection, maintenance or restoration of the health of the person concerned, despite the fact that treatment recommendations may be considered as part of the report.
The primary purpose of medico-legal work is for a third party – a court – to make a decision and hence why this type of work is regarded as standard-rated for VAT purposes.
Therefore, if you are carrying out more than £85,000 of medico-legal work on a 12-month rolling basis, you must register for VAT and add 20% to your fee.
VAT and cosmetic work have been a contentious area for some time and, in many respects, it is due to the lack of understanding by HM Revenue and Customs (HMRC) of the work carried out.
HMRC has often sought to label a procedure as cosmetic rather than looking at the reasons why a patient is having treatment, whether this be for their physical or mental health.
It remains to be seen whether there will be any changes going forward, but, at present, the rules were set when the UK was part of the EU and, for a cosmetic procedure to be regarded as subject to VAT, it must be purely cosmetic.
Therefore, it is important that if you operate in the aesthetic/cosmetic sector, you keep records of the medical condition that the patient is suffering on a case-by-case basis.
Where no medical condition is being treated, you will need to identify this work separately and track the level undertaken to ensure that you do not go over the £85,000 VAT threshold on a 12-month rolling basis. If you do, VAT registration will be required.
This is a complex area and the use of a specialist medical accountant is essential if you are in this position.
As doctors, you may be involved in other activities that could be tax- sensitive for VAT purposes. The more common ones are:
The rules for the above can vary, as do the rules if the work is undertaken in another country.
Accounting for VAT
One important thing to remember when you are VAT-registered is that you are acting as a collector of tax for HMRC.
As a result, you are placed under more scrutiny to ensure that your systems accurately record VAT payable and promptly pay this over to HMRC.
The penalties for not registering or accounting for VAT correctly can be severe and therefore your systems need to be robust. And you can expect them to be reviewed by HMRC periodically via its compliance visits.
Medico-legal work usually takes some time to be paid and therefore it is beneficial to consider some of the VAT schemes available to help you manage the payment of VAT to HMRC.
Accounting for the VAT when you are paid is an important concession for this type of work, as are schemes to reduce the administration required, such as annual accounting of VAT.
Costs on which you suffer VAT are usually deductible against the VAT collected so that you pay over the net amount. However, if you are making a combination of exempt and standard-rated supplies, the calculations are more complex and you may not be able to recover all of the VAT on costs.
Another scheme which is available allows you to pay over a flat rate of VAT which is less than the 20% charged, which can be advantageous if you suffer low amounts of costs with VAT on them.
However, care must be taken here, as the flat rate is payable on all supplies and therefore if you are undertaking clinical and medico-legal work, this scheme is not usually appropriate.
The different VAT schemes have criteria that must be met. Your accountant should discuss with you to determine the most appropriate for your individual circumstances.
VAT can be a complex area and being VAT-registered can be a burden to your private practice. But it is an essential aspect to manage if you are undertaking work that is not exempt from VAT.
Help is at hand to prevent any risk of not registering, and using an accountant who understands the rules and practicalities around the medical sector is essential.
Ian Tongue (right) is a partner with Sandison Easson accountants