A clinic's VAT: which procedure is exempt and why the pro rata goes wrong
Nextica Law & Tax resolves a healthcare centre's indirect taxation, which is where the most money is lost by getting it wrong: applying the exemption in art. 20.One.3 of the VAT Act to care services provided to individuals by medical and healthcare professionals, drawing the line between procedures with a therapeutic purpose and those without —aesthetic work with no curative purpose is taxable—, calculating and adjusting the pro rata where exempt and taxable procedures coexist, and the effect on recovering VAT on equipment and on the premises fit-out.
The clinic invoices almost everything without VAT and recovers VAT on almost everything. Both at once do not hold up.
What's included
1. Classifying the service portfolio procedure by procedure between exempt and taxable, according to the purpose of diagnosis, prevention or treatment.
2. The documentation supporting that classification, because the basis must be capable of being justified and not merely declared.
3. Analysing the ancillary activities that are almost always taxable
product sales, renting a chair or treatment room to third parties, and administrative services.
4. Calculating the pro rata from the year's actual activity mix, and not from the year it was first calculated.
5. Adjusting capital goods —equipment and building works— over the years the rule requires.
6. Reviewing the effect on recovering input VAT on the premises fit-out and on equipment purchases.
7. Reviewing the percentage at each year-end, which is when it can be corrected at no cost.
INVOICING ALMOST EVERYTHING VAT-FREE AND RECOVERING VAT ON ALMOST EVERYTHING
Both at once do not hold up, and the adjustment arrives once the capital goods have already been bought.
Treating the whole activity as exempt
the exemption covers care provided to individuals by healthcare professionals in the exercise of their profession, and the criterion defining it is the purpose of diagnosis, prevention or treatment. Aesthetic treatments with no curative purpose are taxable, as are product sales and renting out a chair.
art. 20.One.3 VAT ActA pro rata calculated once and forgotten
it is a percentage that changes each year with the actual activity mix, and a clinic gradually adding aesthetics, products or space rental recovers less VAT than it thinks.
VAT ActCapital goods adjusted retrospectively
equipment and building works are adjusted over several years, so a deduction taken at one hundred per cent in the year of purchase is corrected if exempt activity grows afterwards.
VAT ActFrequently asked questions
Is everything a clinic does VAT-exempt?
No. The exemption in art. 20.One.3 of the VAT Act covers care provided to individuals by medical or healthcare professionals in the exercise of their profession, and the criterion that defines it is purpose: the service must have the purpose of diagnosing, preventing or treating illness. Hence aesthetic treatments with no curative purpose are taxable, as are product sales, renting a chair or treatment room to third-party practitioners, and much of the administrative services. The classification is made procedure by procedure and must be capable of being justified, not merely declared.
Why does the pro rata almost always come out wrong?
Because it is calculated once and then forgotten, and the pro rata is a percentage that changes every year with the actual mix of activity. A clinic that starts out purely clinical and gradually adds aesthetics, product sales or space rental recovers less VAT than it thinks. On top of that comes the effect that hurts most: capital goods —equipment and building works— are adjusted over several years, so a deduction taken at 100% in the year of purchase is corrected retrospectively if exempt activity grows afterwards. The percentage should be reviewed at each year-end, not when the audit arrives.
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