VAT, Medical Professionals

VAT considerations for GPs and doctors


Simon Misiewicz

20th November 2018

Article relevant to the tax year 2018/19.

Does your GP surgery need to charge VAT?

Our team of GP and Doctor accountants are focused to help you make more wealth and pay less tax on your business and investment activities. This article addresses GP VAT Charges.

The fact that VAT is a cost of running a GP practice is of course nothing new. The large majority of services delivered to patients are exempt from the tax, which prevents its recovery on the costs of providing those services.

Most GP practices are therefore not required to be VAT registered. But beware. The assumption that VAT does not play a role in this sector, except as a cost, no longer holds true.

GP federations – New VAT issues

The advent of GP federations, established to bid for Clinical Commissioning Group (CCG) contracts, brings several new VAT issues into play:

  1. Has the GP federation considered the possibility that any funding received to cover its first (say) 12-18 months operating costs will be liable to VAT? This money is unlikely to be a payment for a provision of healthcare services although it may be for research or studies into the provision of healthcare in the local area. It will therefore most likely be liable to VAT. Has the federation correctly identified the date from which it should therefore be registered for VAT in relation to this receipt of funding, provision of consultancy or research services?
  2. On the assumption that the local CCG is the counterpart for these services, have both parties considered the potential need to charge VAT? CCGs are entitled to recover VAT on specific types of expenditure and that should be considered in relation to these contracts.
  3. Is there a cost sharing arrangement with individual practices to cover the operating costs of the federation? If so, has the VAT treatment of the recharges been considered? As most of the day-to-day costs are likely to be salary related, the recharge of these costs can effectively result in the creation of VAT out of thin air. There is, however, an opportunity for an efficient means of dealing with the cost sharing arrangement between individual practices, and I discuss this below.

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Cost Sharing Exemption

Both EU and UK VAT law contains legislation designed to relieve VAT on the recharge of costs between ‘independent groups of people’ who make exempt or non-business supplies. The UK legislation was introduce in July 2012. This is therefore a basic provision of UK and EU law, which furthermore does not require HMRC permission. It can also be applied on a retrospective basis.

Where a legal entity is established, referred to in UK law as a cost sharing group (the CSG) set up to provide services to its members. Then those services are exempt from VAT when certain conditions are satisfied. In this case, the CSG would be the GP federation.

Let’s take each condition in turn:

The CSG must be an independent entity. A GP federation is typically an entity limited by shares, with each GP practice holding an equal share. As such, the GP federation is clearly independent from each of its members. This because none of them has a controlling interest. The members must carry on exempt activities This condition is clearly satisfied by the individual GP practices. The services must be directly necessary for the members’ exempt activities.

In this case, the members are of course the GP practices. This is quite a involved test. In some cases it will require an analysis of the members’ exempt and taxable activities to ensure that the exemption from VAT only applies to the recharge of costs to support the members’ exempt activities.

As a GP practice rarely makes any taxable supplies, this condition will clearly be satisfied in this case. The CSG must only recover the exact cost from its members

In simple terms, the CSG must not seek to make a profit.  It must be able to demonstrate that it applies a methodology which supports cost recovery from its members. A detailed analysis through the federation’s management accounts would provide appropriate support.

The application of the exemption must not cause a distortion of competition.

In practice, this condition will always be satisfied providing it is clear that the federation is a closed loop, only seeking to support its member practices. In other words, this is not a commercial outsourcing concern in competition with other third parties. The last issue to consider is the employment of staff by the federation. In my experience, senior staff can be seconded to the federation in its first few months to deal with issues arising from NHS pensions arrangements.

For the cost sharing exemption to work, all staff will need to be employed by the Federation or seconded in a manner that will satisfy an HMRC concession to relieve the secondment from VAT.

To ensure the CSG incurred its own staff costs without VAT it would be necessary to do one of the following:

  • Change the entity employing the affected staff so that the CSG becomes the legal employer
  • Establish joint contracts of employment between the CSG and the current employer(s). Again, this change would need careful consideration of any employment or pensions issues, or
  • The CSG would pay the affected staff directly. Including payroll taxes and pension. So that the staff are treated as seconded to the CSG. The CSG can then recharge these costs back to its members in the required proportions. It would be perfectly acceptable for the federation to bid for contracts from the CCG. Plus, still be separately eligible to operate the cost sharing exemption. In this case the federation would need to show appropriate separation of costs relating to CCG business. Plus, that relating to the operation of the cost sharing exemption.

As I’ve already mentioned, the services supplied by the federation must be directly necessary for the members’ activities. And, therefore by association any costs it incurs must only be those relating to the services provided to its members. It is possible for a federation to discover that it satisfies the cost sharing exemption effectively by accident. Purely because of the way it interacts with its
members. This leads to the final issue. Whether to alert the HMRC. Particularly if the federation wishes to apply the exemption on a retrospective basis.

There is no requirement to seek approval from the tax authorities. But, it can demonstrate good governance to notify them that the federation is operating the exemption, without seeking written approval or inviting an audit.

This would provide the federation with a greater level of certainty in relation to its VAT affairs in the future.

In the event of challenge, no penalties should apply. As long as the federation has taken reasonable care, most likely by seeking professional advice into its VAT affairs.


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