Tax expert warns that focus will be on VAT and treatment definitions

One of the UK’s leading experts on tax rules in the aesthetics sector is warning that HM Revenue and Customs Hidden Economy Team is targeting the growing aesthetics sector to ensure correct taxes are being paid, particularly VAT.

Cosmetic businesses that have provided treatments on which VAT is due, but not charged the VAT, will be at most risk of investigation, possibly resulting in fines and penalties. The main risk to a business is the attempted backdating of VAT registration, which can in some cases go back to the business’s first trading year.

Veronica Donnelly, a VAT partner with accountants Campbell Dallas, and an aesthetics VAT specialist, is urging businesses to ensure their treatments comply with guidelines that VAT can be exempt when a treatment is undertaken as part of a health care programme. She explained that there are two essential tests that must be applied to ensure the treatment is VAT exempt:

“The first test is that the practitioner must be on a statutory register and working within their area of expertise as a surgeon, doctor, dentist or nurse. The second test is more open to interpretation, as it focuses on patient health, and whether the treatment provided is of medical care. This is the area that can cause most difficulty, with some businesses applying the wrong test in relation to VAT, potentially making incorrect decisions that leave them exposed to enquiries from HMRC, and the risk of falling foul of VAT laws.”

Ms Donnelly added: “VAT is a European Tax and importantly, HMRC in the UK does not have the final say in how VAT law should be interpreted. HMRC’s focus on the patient perspective was successfully challenged in a landmark ruling by the Court of Justice of the European Union. The CJEU determined that whether a treatment qualifies as ‘purely cosmetic’ is a matter for the medical professional providing the treatment, not the patient’s opinion. Despite the ruling, VAT in Aesthetics remains a complex area, and is open to interpretation by the treatment provider, and in turn by the Tax authorities.”

Aesthetic businesses are being urged to use the two tests to help ensure that they correctly apply VAT exemption to a treatment. Any treatment that does not pass the tests must be charged at the standard prevailing VAT rate, currently 20 per cent. Treatments provided and decisions on VAT exemption must be accurately and properly recorded.

Ms Donnelly stressed that whilst well-managed clinics have little to fear, the Aesthetics sector has grown rapidly, and there will be many practitioners and businesses that are at risk of an enquiry:

“Public finances are under considerable strain, and HMRC is looking to dramatically increase tax revenues. The Hidden Economy team is a specialist group that targets sectors where there are likely to be good recovery rates, and the Aesthetics sector is on their radar. We would urge any practitioner or business that is concerned to contact us as soon as possible. We have an extensive team and a quick VAT health-check could help avoid serious financial problems. The only way to deal with tax is to comply with the law, and ensure the correct taxes are paid.”