VATHLT2575 - The services of the medical and paramedical professions: pathology services

As a result of the Carter report on the review of NHS outsourcing services (2006), which recommended the streamlining of NHS services, some NHS pathology services have been, or are being, outsourced to the private sector. HMRC consider that such services are exempt from VAT. Some suppliers of these services challenged our view. The suppliers consider that their pathology services are taxable on the grounds that:

(a) the supplies do not amount to diagnostic services, but merely provide information to a third party to enable the third party to make a diagnosis, or

(b) the suppliers are not state-regulated institutions or are not making their supplies in a state-regulated institution

Our policy is that the supply of laboratory pathology services that directly relate to the provision of healthcare for individual patients is exempt from VAT. This applies to all businesses that are state-regulated and supply laboratory pathology testing services, whether they supply the services to the NHS or to independent hospitals.

The Tribunal found in our favour in the case of GSTS Pathology Services LLP TC03351 [2014] UKFTT 211 (TC)

The following paragraphs of that decision are particularly helpful:

3. GSTS supplies services to three NHS Trusts and some other clients. We are only concerned with its supplies to the Trusts. These are to a large extent, though not exclusively, supplies of pathology services – testing samples of body fluid, tissue, etc. and communicating the results to the Trusts for the purposes of the supply of services of medical care by the Trusts or other health professionals to patients. The first issue is whether the supplies of pathology services are exempt from VAT as themselves constituting ‘medical care’ as that expression has been construed by the European Court of Justice (‘CJEU’)

4. The second issue is whether, even if the supplies are of medical care by a recognised body, HMRC are (as GSTS contends) under an EU law obligation to achieve the result that the supplies are not exempt, either by applying conditions which article 133 of Directive 2006/112 allows Member States to impose and GSTS does not satisfy or by declining to recognise GSTS as a medical establishment for the purposes of the Directive. The basis of the argument is (a) that in the particular circumstances prevailing in the United Kingdom, where s 41 of the Act enables NHS Trusts to reclaim VAT paid out by them for laboratory services, treatment of GSTS as taxable would reduce the overall tax burden by enabling GSTS to recover its input VAT and (b) that the purpose of these exemptions, to which HMRC are under a duty to give effect, is to reduce the VAT burden on medical care; in the circumstances at issue, that is achieved by withholding exemption. Our conclusions on this are that the discretion which the Directive leaves to Member States has been exercised in the United Kingdom in the framing of the relevant provisions of the VAT Act 1994, which HMRC have no residual discretion to over-ride, and that EU law does not in any event impose a duty on Member States to make exemption unavailable to a taxpayer on the grounds that standard-rated treatment would 5 be more advantageous for it.

Medical care

111. We reject Ms Whipple’s submission that GSTS’s supplies do not have a ‘therapeutic purpose’ within the meaning of the case-law. On the contrary, we find that they do. The function of the ‘therapeutic purpose’ test enunciated in D v W, Unterpertinger and d’Ambrumenil is to distinguish between medical activities undertaken for the purpose of protecting, maintaining or restoring human health from those undertaken for a different purpose such as informing a judicial or other decision of a non-medical character. It is not a test aimed at distinguishing between ‘medical care’ and ‘closely related activities’. Ms Whipple would be right to say that GSTS’s activities do not in themselves have the effect of protecting, maintaining or restoring health – it is the use that clinicians make of them that does that – but they have that purpose since they are supplied in order to be used in that way. We appreciate that in this respect we are differing from the approach taken by the Tribunal in In Health at paragraph 53 of their Decision.

112. That leaves the question of whether pathology testing is, as a matter of EU law,

‘medical care’ or a ‘closely related activity’. GSTS’s difficulty here is that LuP holds that an ‘upstream’ supply of pathology testing is medical care – an argument to the contrary being specifically rejected at paragraph 37 of the judgment) – and Verigen holds that an upstream supply of cell culturing – another laboratory activity – is medical care as well. Ms Whipple submitted that a distinguishing feature of Verigen was that cells cultured by Verigen from the patient’s cartilage were re-injected into the body of the patient, but we cannot see that that is a relevant distinction. In the present case material from the patient’s body is used to produce not a physical substance of value in his treatment but information of value in his treatment. In both cases the connection of the activity with medical care is that it aids the clinician in that task.

This Guidance confirms that:

  • state-regulated pathology laboratories are ‘qualifying health institutions’, for the purposes of Item 4 of the health exemption (Group 7 to Schedule 9 of the VAT Act 1994).
  • laboratories are providing exempt medical services when their services are connected with the protection, maintenance or restoration of the health of an individual

Why are state-regulated pathology laboratories ‘qualifying health institutions?’

An institution is ‘state-regulated’ if it is approved, licensed, registered or exempted from registration by any Minister or other authority pursuant to legislation. A pathology laboratory which is state-regulated qualifies for the purposes of the exemption irrespective of the location from which it provides its services. It makes no difference whether it occupies premises with or within a hospital or in a separate location.

When are state-regulated pathology laboratories providing exempt medical care?

Services supplied by a pathology laboratory or other similar state-registered institutions are exempt if they are:

(a) made in respect of an individual.

(b) medical services, that is, they are connected with the protection, maintenance or restoration of the health of an individual. These include, but are not necessarily limited to:

  • tests performed as part of a routine check-up to confirm whether or not an individual has been exposed to a particular virus or is suffering from a certain medical condition
  • diagnostic services or services helping another health professional or health institution to make a diagnosis
  • tests to establish the overall health of patients to ensure that they are fit enough to have an operation
  • other tests provided as part of the medical treatment of a patient

When are state-regulated pathology laboratories’ services not covered by the health exemption?

Exemption does not apply when the services are not:

(a) concerned with the protection, maintenance or restoration of the health of specific patients, for example, the analysis of samples for general research purposes or for autopsies

(b) performed primarily for the protection, maintenance or restoration of the health of the person concerned but are done solely to provide a third party with information necessary for taking a decision on non-medical matters such as insurance claims, or for legal purposes

Making claims or adjustments

Where a business has accounted for VAT on supplies of pathology services which qualify for exemption it may make a claim to HMRC (under section 80 of the VAT Act 1994) for repayment of VAT incorrectly accounted for subject to the conditions set out in Notice 700/45 How to correct VAT errors and make adjustments or claims.

All claims are subject to the four-year time limit in section 80(4) of the VAT Act 1994 and to the set-off provisions in section 81 of the VAT Act and section 130 of the Finance Act 2008.

We may reject all or part of a claim if repayment would unjustly enrich the claimant.

More details on making claims and ‘unjust enrichment’ can be found in Notice 700/45 How to correct VAT errors and make adjustments or claims.

Pathology outsourcing which involves separate supplies of pathology services and of laboratory facilities management

While a supply of pathology services is exempt from VAT under Item 4 of Group 7 to Schedule 9 of the VAT Act 1994, a separate supply of facilities management (such as managing a pathology laboratory) is taxable at the standard rate.

Where pathology services are outsourced, those third party service providers may arrange their structures so that supplies of laboratory facilities to the NHS Trust are made by one entity and pathology testing services to the NHS Trust are made by a second (but often related) entity which utilises those laboratory facilities.

In those circumstances the supply position needs to be established before the correct VAT liability of those supplies can be determined. Each case should be looked at on its own merits. Where the underlying contractual relationships demonstrate that the two lines of supply are capable of separate independent operation (e.g. one contract could be taken over by an unconnected party) then it is likely that two separate supplies will exist for VAT purposes, each with their own liability.

Occasionally, another entity (e.g. a Limited Liability Partnership) is interposed in each chain of supply between the third party outsource entities and the NHS Trust. Provided the independence criteria are still met, these additional links in the chain of supply are unlikely to affect the overall position. Guidance about single and multiple supply, including the indicators of multiple supply, can be found in VATSC80000 - Single and multiple supplies