Illuminate Skin Clinics Limited and Mark Glenn Ltd: when can cosmetic procedures be exempt from VAT?

Following our Keynote on where the law stood regarding the VAT treatment of cosmetic procedures, the Upper Tribunal gave its view in Illuminate Skin Clinics Limited which lays down a multi-factorial analysis to be used to determine whether a procedure is exempt from VAT. More recently, the Upper Tribunal’s decision in Mark Glenn Ltd, concerning the zero-rating of aids for the disabled, could assist with arguments that a wider range of cosmetic procedures should be exempt from VAT.

Supplies are exempt from VAT where they consist of the provision of medical care by a registered medical practitioner. In Illuminate, the relevant supplies had been made by a registered medical practitioner and included Botox and dermal fillers, Aqualyx injections, and the treatment of thread veins and warts. The dispute turned on whether the supplies consisted of the provision of medical care.

Illuminate argued that that where there was an underlying health disorder that was being treated, the supply had a therapeutic purpose and so was exempt from VAT. Further, it was immaterial whether there was also a cosmetic purpose for the procedure.

The Upper Tribunal rejected that argument, holding that where there is both therapeutic and cosmetic purposes, it is necessary to identify which was the principal purpose and that determines the VAT treatment.  Doing that: “…will involve a multi-factorial analysis which is likely to include consideration of…” and the Upper Tribunal listed seven factors which are likely to need consideration:

(1) any diagnosis made by the medical practitioner making the supply…;

(2) the nature of the disease or medical disorder which has been diagnosed;

(3) the symptoms exhibited by the client;

(4) the intrinsic nature of the procedure;

(5) the circumstances in which the client consulted the medical practitioner, including the context in which the supply is made and how the supply is marketed;

(6) the client’s understanding as to the aim of the procedure; and

(7) the medical practitioner’s understanding as to the aim of the procedure, including

any prophylactic aim.”

Plainly, undertaking such a detailed multi-factorial analysis for each procedure presents a significant challenge.  HMRC may well look for easy wins where, if a Provider cannot produce records to support the exempt treatment, it will regard the supply as standard rated and demand payment of the VAT.

Providers should aim to capture the sort of information that the Upper Tribunal has indicated will support a decision to treat a supply as exempt.

There are different challenges when dealing with procedures that have already been carried out. Providers will need to review historic records, which could include how they marketed their services, who performed them, information leaflets provided to patients and so on. They will also need to review their data retention policies, and avoid deleting emails, disposing of old electronic devices, paper records or anything else which might contain information of relevance. It may still be some years from now before HMRC asks why supplies have been treated as exempt – generally it is able to review the last four years of a taxpayer’s VAT returns and that can be extended to six years and even longer in some cases.

Healthcare providers have separate obligations to retain medical records, usually for a minimum of eight years. But those obligations don’t apply to related information such as marketing records, or to patient information leaflets that are not incorporated into individual patients’ records. Therefore, Providers cannot assume that compliance with the rules relating to retention of medical records means that they have retained everything that might be needed to deal with an HMRC investigation.

The importance of a diagnosis

The Upper Tribunal held: “If there is no diagnosis, then in our view a taxpayer must offer cogent reasons as to why a treatment is said to have a therapeutic aim. Without a diagnosis or cogent reasons as to why there is no diagnosis it is difficult to see that the taxpayer would be able to discharge the burden of establishing that the principal purpose of a procedure was therapeutic.”

The Upper Tribunal acknowledged that a detailed investigation and analysis may not be required to support a diagnosis, for example, the diagnosis and treatment of a wart. It said that the First-tier Tribunal had been wrong to entirely disregard notes considered too cursory to be evidence of a diagnosis and appropriate evidential weight should have been given to such notes. It decided the case had to be sent back to the First-tier Tribunal for that evidence to be reconsidered as part of applying the multi-factorial assessment to determine the principal purpose of each supply.

Any purported diagnosis must be one that the relevant registered medical practitioner is qualified to make. For Illuminate there was no issue with the relevant registered medical practitioner diagnosing many of the medical conditions that were being treated e.g. warts and tension headaches. However, they were not qualified to diagnose mental health disorders. As such, if a Provider of cosmetic procedures wishes to assert that the principal purpose of a particular supply was to treat a mental health disorder, they will struggle to support that without a diagnosis from a suitably qualified medical practitioner.

What doesn’t amount to medical care?

Illuminate had argued that helping people feel better about their appearance can in itself amount to medical care. The Upper Tribunal rejected this, saying: “In the absence of a diagnosis or any other indication that a procedure is preventing or treating a mental health condition, a supply could not fall within the exemption.”

To show that a mental health disorder was treated, a Provider would ideally have:

• a record of a diagnosis of a mental health disorder made by a registered medical practitioner qualified to make that diagnosis; and
• and evidence that the principal reason for the supply made was treatment for that medical condition.

Could the Mark Glenn Ltd decision assist?

In Mark Glenn Ltd, the Upper Tribunal decided that the term “disability” is defined materially more widely than HMRC had argued. The decision has been made in the context of the zero-rating of supplies of “drugs, medicines, aids for the disabled, etc”. The case concerned the supply of a form of specialist wig to women suffering severe forms of hair loss and related services. The UT noted HMRC’s submission that hair loss does not per se prevent a person from carrying out everyday activities, but held that:

“It is impossible to ignore that every day activity does not take place in the abstract but within a social context. The question is the nature and impact of the condition and that will depend on the particular facts and circumstances. The question of whether a condition amounts to a disability should in our view recognise that the impact of the condition may arise from the background social reality of how people with the condition are treated. We accordingly consider HMRC’s purely physically based approach as too narrow when considering the impact of the condition. The assessment of the impact of disability should take full account of any real-world social context. To ignore the very real impacts a disfiguring condition might have on the everyday activity of someone seeking to go about the daily business of life, which will inevitably involve activity where one is visible to and required to interact with others, is to deny social reality.”

Perhaps similar “real world social context” issues should be considered as part of the multifactorial assessment espoused by the UT in Illuminate. It could be argued that they form “cogent reasons” which help to show a therapeutic aim for the treatment. Examples could include laser skin resurfacing for facial acne scars, and various other treatments depending on the context.

Whether a Provider is seeking to prevent difficulties with HMRC, or is currently facing a tax investigation, specialist legal advice is crucial. Tax lawyers and healthcare lawyers working in tandem can maximise the prospects of a good outcome in this complex and evolving area.

If you have questions or concerns about the issues raised in this article, please contact tax lawyer Matheu Smith or healthcare regulatory lawyers Joanne Staphnill and Tracy Sell-Peters.