The medical care VAT exemption: what healthcare companies can learn from UK case law

Any businesses seeking to rely on the exemption should seek expert advice that accounts not just for what the UK’s VAT legislation states but also how the law has been interpreted by the UK tax tribunal.

Businesses would also be advised to consider the structure in which services are provided and ensure they have sufficient evidence to support their reliance on the exemption. This evidence might include website content, contracts and invoices.

Two of the cases also show the need to carefully consider, for VAT purposes, whether certain types of care provided are genuinely therapeutic or purely cosmetic in nature. With aesthetic medicine in the healthcare industry on the increase, these cases should provide some food for thought on the VAT position.

The first case

The first case centred on whether Vision Dispensing Limited's (VDL’s) online sale of contact lenses was VAT exempt on the basis that it constituted a supply of medical care and the service was wholly performed or directly supervised by appropriate persons.

UK law permits sellers of contact lenses to enable repeat purchases without the need for appointment. Those sales can be enabled if there is a copy of the original specification and the seller then verifies it with the optometrist who did the test. The seller must also be under the general direction of a suitable individual, such as a registered optometrist.

Opticians generally provide two types of supply: exempt medical care services, like eyesight tests and the fitting of glasses or contact lenses; and standard VAT-rated goods, like glasses and contact lenses. The amount the customer pays is usually apportioned between these services for VAT purposes. UK-based online supply of contact lenses is generally not viable, however, because optometrists refuse to verify specifications to online suppliers. The position is different in other countries – for example, in the Netherlands, the regulation is much more limited.

The sister company of VDL, VDBV, was located in the Netherlands. It operated a website through which prescription lenses were supplied to UK customers. Those UK customers entered into two contracts – one with VDBV for the supply of contact lenses and the other with VDL for the supply of dispensing services. Of the consideration for the online order placed on VDBV’s website, 18% was treated as paid to VDL for dispensing services – and VDL treated this amount as VAT exempt.

VDL stated that the provision of medical care was carried out in a number of ways, including through: ongoing clinical advice by VDL through its website, including instructional videos, how-to rules, blogs, and a live chat with customer assistants; vision assessment and advice, with a view to assessing any potential errors with the contact lenses; comfort checks; advice on upgrades; advice on eye test appointments; clinical irregularity safeguards; contact lens aftercare; and emergency advice and infection protocols. VDL claimed all of those facets of its services offered a better of standard of care than a customer could expect to receive on the high street.

In respect of the supervisory element of the exemption, VDL stated the optical assistants who processed the orders were supervised by an appropriate person, described as an Optical Council made up of three opticians who the optical assistants could refer complex customer issues to.

HM Revenue & Customs (HMRC), however, assessed that VDL’s supply arrangements were not VAT exempt under the medical care exemption. The dispute was considered by the UK tax tribunal. 

On the question of whether VDL provided medical care, the First-tier Tribunal (FTT) considered it did not. It reached that view as it considered that the services provided were too remote from a therapeutic purpose and that VDL simply chose the correct lenses and dispatched them with no element of medical care entailed in that process. Whilst the FTT noted that the website was helpful in providing therapeutic services for the wearing of contact lenses such that it could amount to medical care, the website was operated by VDBV and could therefore not be relied upon by VDL as forming part of its services.

The FTT’s findings on this first issue were sufficient for it to dismiss VDL’s appeal. However, it went on to consider the second question of supervision, albeit without going into extensive detail. In this regard , the FTT found that VDL’s dispensing services were not wholly performed or directly supervised by appropriately qualified persons. It assessed that two of the three individuals who sat on VDL’s Optical Council were potentially not suitably qualified opticians. More importantly, the FTT concluded that there was insufficient evidence for it to conclude that the opticians delivered the element of supervision during the relevant period.

The second case

The second recent case involved an online business called Aesthetic-doctor.com Ltd (ADL). ADL was a private medical clinic offering cosmetic treatments, such as botox, dermal fillers and laser treatments, the sole owner of which was a qualified doctor registered with the General Medical Council. After a VAT enquiry, HMRC issued a decision requiring ADL to VAT register from 2010 on the basis that it considered ADL’s services were cosmetic treatments rather than exempt medical care.

ADL disagreed. It claimed that it qualified for the medical exemption on the basis that its services were for a therapeutic purpose which sought to secure the relief or alleviation of the patient’s physical and/or psychological health disorders.

ADL also relied on a House of Commons report which dealt with the impact of body image on mental and physical health and the doctor behind the business told the FTT that he also treated patients with physical abnormalities, though he could provide no evidence to support that statement.  

The FTT found that the services provided by ADL were not medical care. Whilst the FTT confirmed that some services, such as the treatment of physical abnormalities, could qualify for the medical exemption, ADL failed to provide any evidence that established the provision of such care.

ADL also failed to demonstrate a clear therapeutic purpose for the services provided.

This was not a straightforward case, but the FTT dismissed the appeal, indicating that ADL’s services were aimed at, and chosen by, patients wanting to improve their appearance to achieve better self-esteem and that this did not amount to medical care. In reaching that view, the FTT relied on case law to define “medical care” as “diagnosing, treating and, in so far as possible, curing diseases or health disorders”. Had ADL’s evidence been more substantial, some of the services may well have fallen within the exemption. The FTT took some time to cover the evidence that was provided to highlight what was crucially not in the records.

The third case

The third case involved a medical professional called Gillian Graham who operated a company called Skin Science. In addition to analysing whether the supplies were an exempt supply of medical care or a standard rated supply, the FTT also had to consider in this case whether HMRC’s VAT assessment was issued within the prescribed time limit and whether it was procedurally correct for HMRC to raise an assessment for such a long duration – over 10 years.

Graham was a nurse who provided treatment for skin disorders. The relevant question arising for VAT purposes in her case was whether those treatments had a therapeutic purpose. Graham claimed that she diagnosed recognised medical conditions, provided treatment for those conditions, and was fully qualified to do so, and that this resulted in the restoration of her clients’ physical, social and emotional health.

In a similar way to the ADL case, Graham did not provide strong evidence to support her case. She was not able to show that, within the scope of her being a registered nurse, she was able to diagnose and treat psychological conditions. Further, comments provided by customers displayed on her website focused on the cosmetic benefits of the treatment and not the therapeutic purpose Graham claimed. The FTT was not satisfied that there was always a medical need for her treatment.