Dentists extract VAT exemption

A tax tribunal has ruled in favour of two dentists in a VAT dispute with HM Revenue & Customs (HMRC).

The First-tier Tribunal – the body to which taxpayers can challenge HMRC decisions – upheld an appeal by City Fresh Services Limited in a ruling published on 21 July.

City Fresh was set up in 2009 by the two partners, both dentists, of City Dental Practice (CDP), who were also the two directors and only employees of the company. CDP had a contract to provide dental services to the Wolverhampton Clinical Commissioning Group, provided on a sub-contract basis by City Fresh.

In October 2013, HMRC told City Fresh that it should be registered for VAT, backdated to August 2010. It argued that for VAT purposes, it made standard rated supplies of staff, i.e. the partners in CDP, rather than supplying VAT-exempt medical services.

The tribunal ruling acknowledged that the difference between making a supply of services and a supply of staff that provide those services “can be a fine distinction for VAT purposes”.

But it added: “HMRC failed to explain why they believed that the addition of a third entity in a supply chain necessarily altered the nature of the supply being made. We do not accept their basic hypothesis that only one entity in a chain can be making an exempt supply of medical services to patients.

“There are some circumstances in which the insertion of an intermediary in a chain will mean that a supply cannot be treated as a supply of medical services. In this case it is clear that what the ultimate recipient received [the patient] was exactly the same whether that was provided directly from CDP or as a service sub-contracted via City Fresh.

“HMRC made a number of arguments as to why this supply should be treated as a supply of staff but failed to properly explain the legal basis for their approach or provide evidence of the activities of CDP which would have supported their interpretation.

“On that basis we have concluded that [City Fresh’s] approach comes closest to identifying the essential character of this supply, as a supply of exempt medical services. For that reason this appeal is allowed.”

HMRC had argued that treating the chain of supply as entirely exempt would “open the floodgates for multiple supply chains all claiming to be exempt on the basis of one exemption”. However, the tribunal said it did not think the facts in the case would be common and that HMRC had other arguments to combat any arrangements set up for tax planning purposes.

As the case demonstrates, VAT is a notoriously complex tax so it makes sense to work with specialists in the field, like the experienced VAT team at Milsted Langdon.

Our experts can provide guidance on all aspects of VAT compliance and VAT planning, to maximise the efficiency of dental practice VAT arrangements. For more information, please contact us.

Posted in Dentists.