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More pain from VAT on the way

The new regulations regarding those areas of GP work that are VATable, and what the implications are for GPs in different sizes of practice, are discussed by accountant Nick Warner

HM Revenue and Customs (HMRC) has

issued a brief (06/2007) announcing changes to the VAT exemption for some medical services. These will take effect from 1 May 2007. The changes arise from the Dr Peter

D'Ambrumenil decision in the European Court, which is binding in the UK, although HMRC has delayed the change for as long as it was able.

In this case, Dr D'Ambrumenil successfully argued that his expert services were not exempt from VAT, as they were carried out within a legal rather than medical context, and the services were not for the direct benefit of the patient, but a third party.

Who will be affected?

If a practice is not already VAT registered it will not have to register unless the value of standard rated supplies exceeds £61,000 (the current VAT registration limits). If you are a VAT registered practice, which will usually mean you are dispensing, you will have to review your sources of income in order to establish whether or not you now need to add VAT to affected services.

This exercise was carried out by most new registrations last year, so with luck it will only be a case of amending the VAT liability, and the coding in the accounting system.

Most of a practice's existing income will be unchanged for VAT, with items such as the GMS global sum and notional rent

remaining VAT exempt. In addition, for dispensing practices, drugs under NHS prescription will continue to be zero-rated, while those dispensed privately will remain liable to VAT. Personally administered medicines will continue to be VAT exempt.

What are the changes?

The key change centres around the purpose of the service. If the purpose is to maintain or restore the health of the patient, then it will continue to be exempt from VAT. If, however, the purpose is to enable a third party to make a decision, then the service will become standard rated for VAT. According to the brief, the services affected include:

•Expert witness or testimony for the purposes of litigation, compensation or benefits

•Reports for the provision of certain fitness certificates (shotgun, HGV, and so on)

• Some occupational health services.

This is by no means exhaustive and if in doubt you should take advice. Although not specifically mentioned in this brief, pre-

employment screenings will be standard rated under the 'purpose' test, while post-

employment screenings or health checks will continue to be exempt.

Services to insurance companies

This is potentially the most complex area, although HMRC has apparently indicated to some trade and professional bodies that, apart from services that are predominantly legal in nature, the VAT exemption will continue in one form or another.

Restorative medical services designed to help insurance claimants return to work, for example, continue to be VAT exempt, as do health screens under private medical insurance policies.

As regards the preparation of reports by practitioners in order to assess the level of premium set by life insurers, the brief states that these are also to remain VAT exempt services, but under the insurance rather than the health VAT exemption.

However, there is a potential cloud on the horizon because it is uncertain how long such an exemption will apply. It is already under threat from another European Court case in Arthur Andersen & Co. There is a real prospect that such reports for life insurers will become standard rated at a later date.


For a practice that is already VAT registered, the likely increase in its standard rated income will see a small financial improvement in the percentage of VAT recovered on overhead expenses. The downside is the additional time and resources that a practice loses in implementing and monitoring the changes.

That said, the financial implications of making a mistake are likely to be relatively light; if a practice has made an error (or errors) totalling less than £2,000, it can make an adjustment on its next VAT return and avoid interest. If a practice is working under a formal contract with an insurance company, it should make sure that the terms allow it to add VAT if it becomes applicable.

In preparation for 1 May 2007, practices should review their various income streams and highlight any that will now become liable to VAT, as their reporting system will have to be amended to take account of the changes.

Practices that are not VAT registered should keep their standard rated income (such as private prescriptions and fitness certificates) under review and, if approaching the £61,000 threshold, take a reasoned view of whether they should try to remain under it, thereby avoiding the compliance costs brought about by VAT registration. Doctors who provide standard rated services as individuals rather than through the

partnership need not count these towards a partnership's £61,000 threshold, although

HMRC has the power to consolidate this income if it believes such a disaggregation is driven solely by VAT concerns.

HMRC has tried to be helpful concerning these changes – the UK was opposed to making them in the first place – and practices should not be put off from making contact if they have genuine difficulties.

The following information can be downloaded from the HMRC website (

• Information sheet 12/2006: Dealing with issues arising for dispensing practices

• HMRC brief 06/2007: dealing with changes in VAT liability referred to in this article

• Public Notice 701/57 (January 2007) Health Professionals

Nick Warner is a director in PKF (UK) LLP's Guildford office, and has been advising a large number of practices on changes to their VAT –

he can be contacted on 01483 408051 or

e-mailed on

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