VAT – Intervention services for depression and addiction
The client company (AS Ltd) operated as a provider of in-house counsellors and general advice to individuals suffering from addiction and depression and those who were concerned about them. Fees were charged to either patient or family. There was an initial telephone assessment from an experienced counsellor which sometimes led to the development of a care plan. This plan could involve the recommendation of one or more types of treatment including detoxification, residential care, medical and psychiatric care, various forms of group support and outpatient individual counselling. Therefore in some cases AS Ltd’s fees represented only counselling, however in the majority of cases the company referred the individuals to institutions such as clinics and treatment centres for which it received a referral commission.
In order to be free of UK VAT the services provided had to fall within one of the exemptions in article 132(1) of Directive 2006/112/EC for certain health and welfare services. The relevant provision was article 132(1)(c):
‘The provision of medical care in the exercise of the medical and paramedical professions as defined by the member state concerned.’
The provisions of article 132 are reflected in UK law in Group 7 of Schedule 9 to the Value Added Tax Act 1994. In UK law article 132(1)(c) is transposed as Item 1 Group 7 VATA 1994:
‘The supply of services consisting in the provision of medical care by a person registered or enrolled in any of the following –
(a) the register of medical practitioners or the register of medical practitioners with limited registration;
(b) either of the registers of ophthalmic opticians or the register of dispensing opticians kept under the Opticians Act 1989 or either of the lists kept under section 9 of that Act of bodies corporate carrying on business as ophthalmic opticians or as dispensing opticians;
(c) the register kept under the Health and Social Work Professions Order 2001’
Paragraphs (a) to (c) of item 1 include supplies of services made by a person who is not registered or enrolled in any of the registers or rolls specified in those paragraphs where the services are wholly performed or ‘directly supervised’ by a person who is so registered or enrolled.
Based on analysis of the relevant UK and EU law, a three-pronged approach was recommended:
1. Stripping out the third party fees from AS Ltd’s supplies so as to reduce the value of any standard rated supply. Those third party supplies would be exempt when supplied directly by the third party provider.
2. Writing to HMRC seeking their agreement that the exemption for supplies of medical services by psychologists can be applied in the future:
a) if AS Ltd employed a ‘supervising’ psychologist or psychiatrist; or,
b) on the basis that the services supplied by AS Ltd were indistinguishable from those supplied by a psychologist in the same circumstances and therefore should be treated in the same way for VAT purposes.
2(a) was more likely to succeed than 2(b) provided it was possible to satisfy the ‘direct supervision’ criterion.
3. Seeking to persuade HMRC that AS Ltd were (and always had been) providing exempt welfare services falling within article 132(1))(c) of Directive 2006/112/EC. This was arguable based on EU law but HMRC would not agree without litigating the matter. The argument in 2 was easier to make if the facts supported it.
Approaching HMRC was a slow, time-consuming and, often, frustrating process but getting their agreement in advance would pre-empt any future attack.
Update (at July 2015)
The decision of the First-tier Tribunal in M J Fenwick Consultancy was released in October 2013. The tribunal considered the ‘direct supervision’ test in Item 1, Group 7, Schedule 9 Value Added Tax Act 1994 and was of the view that ‘direct supervision does not involve standing over the person at all time but is a matter of fact and degree having regard to the circumstances of the case’.
An interesting change of tack by HMRC in City Fresh Services Limited where they argued before the First-tier Tribunal that, in order to be exempt under article 132, the medical care had to be provided directly to the patient. The tribunal rejected this argument saying, at paragraph 36 of the decision:
‘The legal form of the person providing medical care is not relevant, neither is the fact that the recipient is not the final patient; there is no need for supplies of medical care to be made direct to the final patient. On this point we agree with the Appellant that there is no basis for concluding, as HMRC seem to have done, that dentist services must be provided directly to a patient. HMRC did not provide any clear explanation of why they believed that to be the correct interpretation of the legislation.’
At the time of publication this case study was technically accurate however, as tax law and practice change rapidly, you should take specific advice before taking any action.