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Gold, incentives and meh

Changes to


that could

cost GPs

A new European law could lose partners in some some GP practices up to £4,000 a year on non-NHS earnings ­ accountant Barry Stocks explains the situation and offers advice

HM Revenue & Customs (HRMC) recently published a consultation document on the VAT treatment of certain medical services following a decision in the European Court of Justice concerning the VAT treatment of medical reports.

Certain areas of practice are likely to be changed following the consultation and medical practices affected by the changes should be considering various courses of


The consultation was prompted by the 2003 case of Dr Peter d'Ambrunenil, in which the European Court of Justice (ECJ) held that VAT exemption for medical services was limited to those services intended principally to protect, maintain or restore the health of the patient.

The ECJ made clear that services falling short of this do not qualify for exemption, whereas HMRC had previously taken the view that any services provided by medical professionals using their professional training and knowledge were VAT exempt.

This was clearly too generous an interpretation, so the questions to be addressed by medical professionals now are:

·which services are likely to become VATable?

·what will that mean for practices?

What will be VATable?

All primary care remains unaffected by the ECJ judgment ­ for example NHS services provided by doctors will remain free of VAT. Services specifically identified by the court which should be VATable are:

·certificates of a person's medical condition for purposes such as entitlement to a war pension or incapacity benefit

·medicals conducted to provide an expert opinion regarding issues of liability and the quantification of damages in personal litigation cases

·preparation of medical reports in personal litigation cases (with or without a medical examination)

·medicals for an expert opinion in professional medical negligence cases

·preparation of medical reports in medical negligence cases (with or without a medical examination)

·pre-employment medicals.

Areas where there is doubt as to VAT status include certificates for fitness to carry out a professional activity, or activities requiring a sound physical condition such as:

·certificates of fitness to drive for the

elderly, and those recovering from a medical condition

·certificates of fitness to fly for pregnant women, pilots, and those returning home after an accident.

Where the certificate is to confirm a person's fitness (which is required as a condition of allowing the person to carry out a particular activity) the court's judgment would appear to mean that exemption would not apply ­ ie the service would be VATable because the principal purpose of the service is to provide a third party with information on which they will base their decision.

On the other hand, where the certificate is to make clear to a third party that a person's state of health imposes limitations on what they can do, or requires an activity to be carried out under certain conditions, exemption would still seem to apply.

The consultation document asked 22 questions. These aimed to determine wheth-er the medical professional is aware of the reasons for their reports, the time spent each week on medical reports and income levels from various activities.

It would appear that the purpose behind the questions was for HMRC to get an idea of how many medical practices will be caught by the changes and how many are likely to need to register for VAT.

Will we need to register for VAT?

The answer is only if the turnover from the services that become liable to VAT exceeds the VAT registration limit when aggregated with any other VATable turnover the practice has.

If a practice's income from VATable activities is more than £60,000 (in 2005/6) it will need to register for VAT (this limit is normally increased in each year's Budget).

An important thing to remember is that VATable activities include those that are zero rated, but not those that are VAT exempt. Zero-rated income includes drugs dispensed by dispensing doctors (but not self-administered drugs which are VAT-exempt following the case of Doctor Beynon and Partners). If you are in any doubt over the VAT liability of any of your supplies you should seek professional advice ­ this is a very complex area.

Broadly, the £60,000 threshold applies when, in any 12-month period, you exceed the limit ­ you must then notify HMRC within 30 days and be registered from the first day of the month following the month in which the limit was exceeded. Here's an example to demonstrate how this works.

On 22 December 2005, Dr J's VATable supplies in the past 12 months exceeded £60,000 for the first time. Dr J becomes liable to be registered from 31 December 2005 and must notify HMRC by 31 January 2006. Unless an earlier date is mutually agreed, HMRC will register Dr J with effect from

1 February 2006.

There is a further registration trigger ­ if, at any time, you have reason to believe you will exceed the £60,000 limit in the next 30 days. Again this is best illustrated by way of an example.

On 22 December 2005, Dr X anticipates his supplies in the next 30 days exceeding £60,000. Dr X becomes liable to be registered on 22 December and must notify HMRC by 22 January 2006. HMRC will register Dr X from 22 December 2005.

What is the impact of VAT registration on practices?

Once registered, a practice must charge VAT on all VATable goods and services, but not on VAT-exempt or zero-rated goods and services. The practice must then ensure that its accounting system is geared up to add VAT to appropriate sales and identify and allocate VAT incurred on purchases.

VAT registration is not all bad news; it does mean that VAT on certain costs can be recovered. Because a practice makes a mixture of VAT-exempt and VATable supplies it is what is called 'partially exempt'. This means it will be able to recover some, but not all, of the VAT it incurs on its costs.

Broadly, the practice will be able to recover VAT on costs that are directly attributable to its VATable supplies. VAT on costs directly attributable to exempt supplies will not be recoverable. VAT on costs that are not directly attributable to either VATable or exempt supplies (usually called residual VAT) is recoverable in part.

The standard method of determining how much residual VAT is recovered is to calculate VATable turnover as a percentage of total turnover and apply that percentage to the residual VAT. However, it is possible to agree a 'special method' with HMRC if the standard method does not give a fair and reasonable result.

This is a very brief summary of how partial exemption operates and the issue should be considered in a lot more detail before a VAT return is completed.

Normally, VAT returns must be completed quarterly, but there is an option to complete annual returns if certain conditions are met. These are:

·the business must have been registered for at least 12 months at the date of application (however, if there are reasonable grounds to believe the value of VATable supplies will not exceed £150,000 in the next 12 months, the 12-month period is waived)

·there are reasonable grounds for believing that the value of VATable turnover in the next 12 months will not exceed £660,000

·the current VAT registration is not as a VAT group, and

·the business has not previously operated the scheme in the 12 months preceding registration.


To a practice that has never been part of the VAT club before, it can seem a daunting prospect, but with careful planning and implementation the transition to a VAT registered practice can be made without too much pain.

As a starting point, practices should be considering four key questions:

1 How much income they receive from those services where VAT liability looks likely to change from exempt to VATable ­ and

will this take them over the VAT registration limit.

2 If the answer to the first question is Yes, they should review their accounting system to ensure it can cope with VAT, both on the sales and purchase side.

3 Are there any reliefs or special schemes that could simplify the administration and compliance?

4 Think about the partial exemption position ­ does the standard method give a fair and reasonable result or should a special method be considered?

Barry Stocks is a senior manager at PKF (UK) LLP

This article has been prepared as a general guide; it is not a substitute for professional advice. Neither PKF (UK) LLP nor its partners nor employees make any representation regarding its completeness or accuracy and they accept no responsibility for any loss or damage incurred as a result of any user acting or refraining from acting upon anything contained in this article or upon its omission therefrom.

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