So, you’re a medically qualified aesthetic practitioner and you’re amazing at performing treatments and making people feel absolutely incredible. But that’s not all that’s involved in running an aesthetic business, is it? What about VAT? Though it can seem like a confusing topic, you’re not on your own! I spoke to Veronica Donnelly, VAT Partner at Campbell Dallas, who explains below exactly what you need to know about VAT in aesthetics.
“At the start of any business there are so many things to think about: are you a sole trader or limited company? What about payroll and insurance? And then, of course, there’s VAT registration. Well, actually, you may not need to register for VAT at all.
Do I need to register for VAT?
VAT registration is only required if your turnover exceeds the threshold set by HMRC - currently £85k - but that threshold only includes your taxable income, which might be less than your total turnover. If you make supplies which are exempt from VAT then these are not included in the calculation.
So, when might your supplies be exempt from VAT?
HMRC’s guidance is remarkably scant. According to Notice 701/57, Para 4.4 Cosmetic services, “Each case will need to be considered on its individual merits. However, we will generally accept that cosmetic services are exempt where they’re undertaken as an element of a health care treatment programme. Where services are undertaken purely for cosmetic reasons, they will be standard-rated.”
The Law is actually more helpful and sets out a two-part test which broadly says that 1) If you are a medically qualified person on a medical register, acting within your training, experience and knowledge, and 2) you provide medical care, then your supplies are exempt from VAT. Medical care is defined in different ways but, for VAT, is generally taken to be treatment where the purpose is mainly for the protection, maintenance and restoration of health. The purpose is the important test for VAT; it is not enough to be a medical treatment - it must be a medical treatment given for medical purposes.
If you sell products separately from any treatments, give treatments for a mainly cosmetic purpose, or give treatments where a medically registered person has not made a diagnosis of a condition before treatment commences, then these supplies will be included in your taxable income.
The VAT registration threshold is measured on a rolling 12-month basis, not your financial year, so you will need to keep a monthly record of your total taxable sales in order to know when you may be required to register for VAT. Please bear in mind that you can choose to register for VAT before you are required to do so, which is known as a voluntary registration. In either case VAT is only due on the taxable income, not the exempt income.
If you are comfortable your treatments qualify for exemption, you will need to maintain records to prove this to HMRC. Usually, your records will comprise a consultation form which the patient completes setting out medical history, current treatments and reason for this consultation. You will probably have a treatment plan attached which you complete. The crucial record for VAT is the diagnostic sheet in the middle. The medically qualified person must record the diagnosis of the condition being treated (physiological or psychological), which is the purpose of the treatment, e.g. acne, hyperhidrosis, etc. Without this it is more difficult to demonstrate to HMRC that you are providing a treatment for a medical purpose.
This is an area in which HMRC are showing a great deal of interest so it is essential that you keep full and complete records.
If you find that your taxable income exceeds the threshold then you are required to register. You can apply online or ask your accountant to do it for you. You will then have to submit returns on a quarterly basis. This must be done digitally and, again, your accountant can help you do this.
Other tax issues to consider
If you employ staff you will need to register for PAYE and with the Pensions Regulator. Staff who are self employed and who work with you as contractors may not be liable to PAYE, but you should check this with your accountant to confirm they meet HMRC’s self employment tests.
You should also discuss with your accountant whether you should be trading as a sole proprietor or a limited company. The tax treatment for both is different, so too are the risks associated with the differing legal status. A limited company will limit your liability should you be sued by a client or supplier, protecting you from claims against your private assets such as your home, but will come at a cost of additional accounting fees.
In all cases I recommend you take advice from a qualified accountant who has expertise in the aesthetics sector. Too often, I am contacted by businesses who have registered for VAT because their accountant told them they had breached the £85k threshold but who were actually making exempt supplies. This is a specialist area and you should take advice from someone who understands your specific needs and risks.”
Veronica Donnelly is the VAT partner at Campbell Dallas and heads up the firm’s specialist Aesthetic teams for accounts and tax. She has worked in VAT for over 30 years, firstly in HMRC and then in accounting firms, where she qualified as a Chartered Tax Adviser. Veronica speaks regularly at Aesthetic conferences across the UK and writes articles for sector publications.