HMRC has published updated partial exemption guidance in Manual PE21500.
The main changes are in respect of updated case law, including the Royal Opera House Court of Appeal case dealing with the attribution of input tax.
In that case the CoA considered: the test of direct and immediate link, economic necessity, business/non-business, and chains of transactions.
We know that burying a deceased person is exempt, but exhumation is standard rated and we now know, thanks to the UK Funerals On-line Ltd FTT case, that the service of the repatriation of the body of a deceased person can be viewed as either an exempt supply of funeral services or a zero-rated supply of transport services.
This being the case, zero rating trumps exemption via of The VAT Act 1994, section 30(1).
HMRC has updated VAT Notice 701/57 – Health professionals and pharmaceutical products.
The changes, in summary, are:
Para 2.1 – Pharmacy technicians (only in England, Scotland and Wales) has been added to the meaning of a health professional list.
Para 2.5 – Services directly supervised by a pharmacist has been removed: Services that are not exempt from VAT.
Para 4.7 has been updated to make it clear when forensic physicians services are exempt healthcare.
Para 5.2 – Services supervised by pharmacists are now included when referring to a health professional: Exemption of care services performed by a person not enrolled on a statutory medical register.
The exemptions covered in the health and welfare area are complex and even slight differences in circumstances can change the VAT liability of a supply. Additionally, there are further exemptions for charities and NFP bodies and the age-old issue of business/non-business.
We advise that specialist advice is sought when considering the VAT position of supplies in this area.
Dance classes in some EU countries are subject to different VAT rates depending on whether the dance style is considered artistic or entertainment. In the UK, belly dancing and ceroc lessons are standard rated, but ballet is exempt.
VAT Notice 706 has been updated on he option to send an email to get an approval for a partial exemption special method has been removed from sections 6.2, Appendix 2 and how to apply.
Para 6.2 – “Get approval for a special method
You cannot change your method without our prior approval. You must continue to use your current method, whether that is the standard method or a special method, until we approve or direct the use of another method or direct termination of its use.
You can get approval for a special method by using the online service.
If you are unable to use the online service, contact VAT Written Enquiries team by post.
You must explain clearly how your proposed method will work, you should see Appendix 2 in this guide.
When you propose a special method you must include a declaration that the method is fair from its effective date of application, and for the foreseeable future so that from its effective date a fair amount of input tax is recovered”.
Examples of special methods (PESM) are:
Partial Exemption guidance here
Further to my article on insurance and partial exemption, HMRC has published a new definition of what insurance means for VAT as a consequence of the CJEU United Biscuits (Pension Trustees) Ltd and another v HMRC [2020] STC 2169 case.
It is set out in para 2.2 of Public Notice 701/36
There is no statutory definition of insurance, although guidance can be gained from previous legal decisions in which the essential nature of insurance has been considered.
The Court of Justice of the European Union , in the case of United Biscuits (Pension Trustees) Ltd & Anor v R & C Commrs (Case C235-19) [2020], upheld the definition given in the case of Card Protection Plan Ltd v C & E Commrs (Case C-349/96) [1999] which concluded that:
“…the essentials of an insurance transaction are… that the insurer undertakes, in return for prior payment of a premium, to provide the insured, in the event of materialisation of the risk covered, with the service agreed when the contract was concluded”.
HMRC also accept that certain funeral plan contracts are insurance (and therefore exempt from VAT), even though they are not regulated as such under the FSMA insurance regulatory provisions.
Vehicle breakdown insurance is also seen as insurance even though providers are given a specific exclusion under the FSMA from the requirement to be authorised.
The rules for sending, receiving and storing VAT invoices in an electronic format.
What is an eInvoicing?
eInvoicing is the transmission and storage of invoices in an electronic format without duplicate paper documents. The format may be a structured format such as XML or an unstructured format such as PDF.
The benefits of eInvoicing
eInvoicing offers significant advantages over paper invoices. The electronic transmission of documents in a secure environment usually provides for:
Currently, a business does not have to use eInvoicing, but if it does, in conjunction with paper invoices, (a so-called dual system) it can only do this for a short period, ie; if eInvoicing is being trialled.
It is not necessary to inform HMRC that a business is using eInvoicing.
Requirements
eInvoices must contain the same information as paper invoices.
A business may eInvoice where the “authenticity of the origin”, “integrity of invoice data”, and “legibility” can be ensured, and the customer agrees to receive eInvoices
A business is free to select a method of ensuring the above requirements. Examples of ensuring authenticity and integrity include:
HMRC accepts a variety of eInvoice message formats, including:
The eInvoices must be transmitted in a secure environment, using industry-accepted authenticity and security technologies, including, but not limited to: http-s, SSL, S-MIME and FTP.
A business will need to demonstrate that it has control over:
The same rules apply to storage of eInvoices as to paper invoices. A business must normally keep copies of all invoices for six years.
HMRC Access
HMRC may request access to:
HMRC must be able to take copies of information from the system.
If a business cannot meet the conditions for transmission and storage of eInvoicing, it will have to issue paper invoices.
Latest from the courts
In the Illuminate Skin Clinics Ltd First-Tier Tribunal (FTT) case the issue was whether cosmetic procedures qualified as exempt medical treatment.
Background
The Appellant runs a private, ie; non-NHS clinic offering a range of aesthetic, skincare and wellness treatments advertised as: fat freezing, thread lifts, chemical peels, fillers, facials, intravenous drips and boosters. The Appellant’s sole director and shareholder, Dr Shotter, complies with Item 1 (below) in terms of qualifications, ie; she is enrolled on the register of medical professionals.
The list of treatments included:
HMRC contended that these supplies were standard rated because there is no medical purpose behind the treatments, and they are carried out for purely cosmetic purposes. An assessment was raised for output tax on this income.
The Appellant argued that what it provided was exempt medical care via The VAT Act 1994, Schedule 9, Group 7, item 1 – “The supply of services consisting in the provision of medical care by a person registered or enrolled in any of the following:
And its contention was that the primary purpose of the treatments was “the protection, maintenance or restoration of the health of the person concerned”
In the Mainpay case it was established that “medical” care means “diagnosing, treating and, in so far as possible, curing diseases or health disorders”
Decision
Although there may have been a beneficial psychological impact on undergoing such treatments and this may have been the reason for a patient to proceed (and they may be recommended by qualified medical professionals) this, in itself, was insufficient to persuade the judge that the services were exempt. Consequety, the appeal was rejected and the assessment was upheld.
The FTT found that there was very little evidence of diagnosis. This was important to the overall analysis because diagnosis is the starting point of medical care. Without diagnosis, “treatment”, in the sense of the exemption, is not something which is being done responsively to a disease or a health disorder.
The fact that people go to the clinic feeling unhappy with some aspect of their appearance, and (at least sometimes) are happier when something is done at the clinic about that aspect of their appearance, does not mean that the treatment is medical, or has a therapeutic aim.
It was telling that the differentiation, in Dr Shotter’s own words, between what the clinic does from what “a GP or other health professional” does is; diagnosis. It also highlighted the general trend or purpose of the clinic’s activity – helping people to feel better about their appearance, in contexts where their appearance is not itself a health condition, or threatening to their health in a way which mandates treatment of their appearance by a GP or another health professional.
Helping someone to achieve goals in relation to their appearance, which is what this clinic did, is not treating someone’s mental health status, but is going to their self-esteem and self-confidence. It is a misuse of language to say that this is healthcare in the sense that it would fall within Item 1 of Group 7.
Commentary
There has been an ongoing debate as to what constitutes medical care. Over 20 years ago I was advising a large London clinic on this very point and much turned on whether patients’ mental health was improved by undergoing what many would regard as cosmetic procedures. We were somewhat handicapped in our arguments by the fact that many of the patients were lap dancers undergoing breast augmentation on the direction of the owner of the club…
It is worth remembering that not all services provided by a medically registered practitioner are exempt. The question of whether the medical care exemption is engaged in any given case will turn on the particular facts.
Further recent cases on medical exemption here and here.
GOV.UK has published details of the most recent measurement of the tax gap for 2021-2022.
What is the tax gap?
The tax gap is measured by comparing the net tax total theoretical liability with tax actually paid. This is comparing the amount of tax HMRC expected to receive in the UK and the amount HMRC actually received.
The figures
The tax gap is estimated to be 4.8% of total theoretical tax liabilities, or £35.8 billion in absolute terms, in the 2021 to 2022 tax year.
Total theoretical tax liabilities for the year were £739.3 billion.
There has been a long-term reduction in the tax gap as a proportion of theoretical liabilities: the tax gap reduced from 7.5% in the tax year 2005 to 2006 to 4.8% in 2021 to 2022 – remaining low and stable between the years 2017 to 2018 and 2021 to 2022.
Criminal activity and evasion accounted for £4.1billion loss in tax collected.
30% of all underpayments of tax were due to a failure to take reasonable care, while 13% of instances were down to evasion.
A massive 56% of the tax gap is made up by small businesses (up from 40% of the total in 2017-18). Whether this is down to HMRC improving collection from large businesses or an increasing failure to crack down on small business is a moot point. It remains to be seen how HMRC react to this new information, but experience insists that small businesses may expect increased attention for the authorities.
The VAT gap
VAT represents 21% of the overall tax gap.
The VAT tax gap is 5.4%.
The absolute VAT gap is £7.6 billion.
The VAT gap has reduced from 14.0% of theoretical VAT liability in 2005 to 2006 to 5.4% in 2021 to 2022.
More than two thirds of the theoretical VAT liability was estimated to be from household consumption. The remainder came from the expenditure by businesses that supply goods and services where the VAT is non-recoverable (they are exempt from VAT), and from the government and housing sectors.
Information on the method used to estimate the VAT gap is here for those interested (I don’t imagine that there will be that many…).
So, £7.6 millions of VAT is missing. That seems an awful lot.
VAT Claims
HMRC has completely rewritten its manual VRM7000 on VAT repayments and set-off.
When a business makes a claim for VAT (for whatever reason) HMRC have the power to set-off a payment against other amounts due.
HMRC also has a discretion to take account of any taxpayer liabilities in other regimes HMRC administers such as corporation tax or excise duty.
In summary, the new guidance covers: