There has been a long-standing principle that UK VAT exemptions are applied narrowly but could the new government’s very high-profile decision to remove the exemption for supplies of education made by private schools be the start of the removal of other VAT exemptions?
Slippery slope
One obvious area is private healthcare. From a political perspective, there are similarities in that it could be said that only the wealthier members of society opt to pay for private medical care, with the inference being those people can therefore pay additional tax. From a tax technical perspective, the UK’s exit from the European Union allows the UK to make amendments to the UK VAT Act in areas where it was previously constrained by the EU Legislation and, whilst there is a principle that exemptions should apply to goods and services in the public benefit (i.e. not to make the cost of these supplies more expensive) the first step towards changing this approach has already been taken with the charging of VAT on private school fees.
It is worth noting that Insurance Premium Tax is already levied on sales of medical insurance policies, but the addition of VAT to the provision of medical services would increase existing taxation levels. A recent YouGov survey found that one in eight people in the UK used private healthcare and the Office for National Statistics recorded that in 2022 £46.4bn was spent. This gives a large target market for the imposition of VAT on the supply of the medical services themselves.
Exemptions to remain a common area of dispute
Even if there was no change to remove the exemption for health care, we expect to see continued disputes about its scope. The same can also be said for the exemption for financial services. With all exemptions, there is a “cliff edge” in the impact between having to account for VAT at the standard rate of 20% and exempt treatment; the possible addition of 20% VAT either makes supplies more expensive or reduces the supplier’s profit margin. Because of this the application of the exemption is a frequent area of review and challenge by HMRC.
In the finance sector we have noticed a recent trend of HMRC increasing their attention on financial intermediaries and payment processors. Over the last few years, the financial services industry has undergone a major transformation, with a number of new entrants and services in the fintech space. The VAT treatment of intermediary and payment processing services has been the subject of high-profile VAT case law, which has led to increased HMRC scrutiny on the treatment of such services. In our experience, entities often meet some but not all of the conditions required to fall within exemption and so more often than not their supplies are subject to VAT.
Consequences of exemption
Services that are exempt are not taxable for VAT purposes. This has two effects: first, VAT is not charged on the services; and second, VAT incurred on costs directly related to the provision of exempt services is not eligible for recovery.
Exemption can be beneficial for businesses trading with consumers or organisations who cannot reclaim VAT, as the imposition of VAT increases the cost of the supplies by 20%. However, this comes with the disadvantage of the supplier not being able to recover VAT on the costs of the supply.
Businesses that make a mixture of taxable and exempt supplies are “partly exempt” and are required to carry out VAT recovery calculations to determine the amount of VAT recovery to which they are entitled. Getting these calculations right is important as errors in the calculations or the recovery method can give rise to unexpected costs, whilst optimising the recovery calculations can bring savings.
What next?
The only major legislative change announced in the recent Budget was the already known about VAT on school fees. However there has also been recent announcements related to extra HMRC recruitment and a guide published for several taxes as to what HMRC expects to see in terms of managing to be compliant with them. With this backdrop we therefore expect to see continued interest from HMRC on whether businesses are charging and recovering the right amount of VAT. Given the complexities there is every reason to expect that those industries where exemptions apply will be targeted.
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