VAT: changes to the exemption for medical services from 1 May 2007

This Revenue & Customs Brief announces the implementation of changes to the exemption from VAT for medical services, following the European Court of Justice (ECJ) decision in the case of Dr Peter d'Ambrumenil and Dispute Resolution Services (C-307/01). It follows on from earlier Business Briefs 29/03, 18/05 and 04/06.

The changes will take effect from 1 May 2007 subject to House of Commons approval. They affect certain services provided by health professionals registered on a statutory professional register who are registered for VAT. They will not impact on primary health care and core NHS services, which will remain free from VAT.

Background

The ECJ decision concerned the VAT exemption for health services provided by health professionals registered on a statutory professional register. The court held that this exemption is restricted to ‘medical care’, which it defined as those services intended principally to protect (including maintain or restore) the health of an individual. Medical services which are primarily for the purpose of enabling a third party to take a decision – many of which are currently exempt from VAT under UK law – are taxable. This means that VAT liability is dependent on the purpose for which the supply is made – referred to as the ‘purpose test’.

Business Brief 18/05 issued on 16 September 2005 announced a three month consultation entitled ‘VAT: A review of the scope of the VAT exemption for medical services’. This consultation primarily sought to gather information about the activities of health professionals, and the impact that the ECJ decision may have on the health sector and its clients. This consultation exercise has now been completed and a summary of responses received to this consultation is attached.

In response to the consultation responses and in conjunction with the British Medical Association and British Dental Association, HMRC have drawn up detailed guidance on the application of the purpose test to key services.

UK law will be amended with effect from 1 May 2007 in order to limit the exemption from VAT for health services to those services which constitute the provision of ‘medical care’.

Services affected

The services most affected by the changes are:

• witness testimony/reports for litigation, compensation or benefit purposes
• reports/medicals for the purpose of providing certain fitness certificates and
• some occupational health services.

These services will become liable to VAT at 17.5 per cent from 1 May 2007. However, this summary is not exhaustive, and health providers should consider the liability of all their services in conjunction with the guidance given in Notice 701/57 Health professionals (January 2007). If they remain uncertain as to the liability of any of their services having read the guidance, they should contact the National Advice Service on 0845 010 9000.

Action required

The changes will affect health service providers registered on a statutory professional register who provide affected services and whose total taxable income is now over the VAT registration threshold, or who are already VAT registered.

Where the health provider is not already VAT registered, they will need to consider their turnover and if the value of all their taxable supplies, including the income from affected services, is over the registration threshold, they will need to register for VAT at the appropriate time in accordance with the guidelines on VAT registration, Notice 700/1 Should I be registered for VAT. They will then have to account for VAT on all their taxable supplies, but will be able to reclaim VAT on those purchases and expenses which relate to taxable supplies, in accordance with the normal VAT recovery rules and, in particular, the partial exemption regulations.

Registered health professionals who are already registered for VAT, for example, as a result of dispensing changes which took effect on 1 April 2006, will need to ensure that they account for VAT as appropriate on any affected services.

Insurance-related medical services

Business Brief 29/03 issued in December 2003 gave details of certain services – such as conducting a medical to assess the level of insurance premiums – which were specifically considered by the ECJ and ruled to be outside the scope of the health exemption, and therefore taxable. The Business Brief explained that doctors and other health professionals were not required to take any action to register for VAT or charge VAT on these services until such time as HMRC formally implemented the changes.

Although such services will no longer qualify under the health exemption, in a recent tribunal case – Morganash Ltd (MAN/05/0749) – a ruling was given that medical services which were undertaken for the purpose of enabling a provider of life assurance to decide whether to accept a proposal for a policy fall within the scope of the UK exemption for insurance-related services, pending the implementation of the ECJ decision in the case of Andersen (C-472/03). HMRC have decided not to appeal this case and, as a result, accept that insurance-related medical services related to the setting up of contracts, the administration of policies or handling of claims, will remain exempt from VAT, pending any amendment of the UK exemption for insurance services.

Further, the following services will qualify as exempt under the health exemption as being principally for the purposes of protecting, maintaining or restoring the health of the individual concerned:

• health screening under private medical insurance policies – these are regular check-ups to detect early signs of disease
• income/credit protection insurance – medical services where the policy holder has fallen ill (as opposed to losing their job) which are aimed at assisting the individual in returning to a normal life
• motor insurance – where medical services are provided under a policy to assist in enabling an injured motorist to return to full health and/or work. (Note – this does not include medicals undertaken for DVLA purposes to ensure initial or continued fitness to drive which are liable to VAT at the standard rate)
• any other medical service provided in connection with an insurance policy where the principal aim is to assist in restoring the health of the individual.

Medical services provided for the purpose of valuing insurance policies for tax purposes, such as inheritance tax, will become liable to VAT at 17.5 per cent.

Further advice

HMRC will shortly be issuing an Information Sheet giving advice on VAT registration and accounting issues for those affected by the changes.