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Medical testing services

Tax considerations of new activities

Robert Marchant, Partner, VAT and Customs Duty Services and Stuart Weekes, Partner, Corporate Tax
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Over the course of the global pandemic a number of medical diagnostic testing businesses worked hard to provide COVID-19 testing services, investing significant resources in a short time period to scale up their operations to support the demand for testing. As the country engaged with the challenge faced by COVID-19 and the reality that people had to be aware of their health before meeting others, businesses were developing innovative medical testing processes and products. These enabled businesses to keep operating and gradually for people to start meeting family and friends again.

With the worst of the pandemic hopefully behind us and an easing of government restrictions there has been a reduction in testing revenues that businesses will be looking to replace.

One of the considerations when innovating and developing new products is the question of the VAT status of the new activities and specifically whether or not the contemplated supplies fall under the exemption for medical care. Having to account for VAT (at 20% in the UK) has a significant impact on margins. Similarly, getting the VAT treatment wrong can cause unexpected costs at a later date.

Businesses should also be aware that the government offers corporate tax credits for qualifying R&D expenditure. This can provide valuable tax rebates to help incentivise and fund further research activity. In addition, if the product is patentable, the company may be able to claim tax benefits within the patent box.

VAT considerations

A possible consequence of the COVID-19 pandemic has been a raised awareness and interest in the general public for medical diagnosis and an acceptance of self-administering tests to obtain a rapid diagnosis. Some medical testing businesses may look to capitalise on this via the introduction of new testing offerings, such as for blood testing or testing for other illnesses or conditions. A key question is whether or not that product meets the conditions for VAT exemption as a medical care service, or whether VAT has to be accounted for. If it is a product for consumers or one being provided to organisations who cannot reclaim their VAT such as private healthcare providers, then the addition of VAT will most likely increase the cost of the product as the VAT charged would be irrecoverable.

Unfortunately, what may be regarded as a medical service to a layman doesn’t automatically qualify as such under the VAT exemption rules. HMRC’s policy on the VAT treatment of COVID-19 PCR testing services had to evolve rapidly in response to the fast-moving nature of the testing roll out, and some of the significant changes to the regulatory framework applying in the sector. That policy has led to inconsistent VAT treatments being applied by some healthcare suppliers and testing laboratories. This has heightened the risk of HMRC challenging the approach which some suppliers have taken to the application of the VAT exemption and recovery of VAT on their purchases.

While the rule of thumb is that a medical service intended to protect, restore or maintain human health can benefit from VAT exemption there are conditions in relation to how the service is delivered. For care or treatment outside a hospital for instance, its important to establish whether this is wholly performed or directly supervised by a medical professional on one of the recognised professional registers. This is not always clear cut and the commercial aims of managing costs can be a factor. Indeed, one of the learnings from the COVID-19 PCR testing experience is that details such as whether the obtaining of a sample is self-administered and the medical qualification held by the individual carrying out the test (there are also different VAT rules for pharmacists as compared to medical doctors) could impact on the VAT treatment.

Both of these are areas of known dispute with HMRC and future developments may be expected that could have a retrospective as well as prospective impact on COVID-19 PCR testing services. These may be relevant to the way new medical testing products adopting similar methodologies are treated.

Another area of potential future revenue growth is international testing, whereby UK groups carry out their medical testing services for customers with employees overseas. Perhaps for example in relation to multinational groups where a UK parent company agrees a global contract to test or screen the group’s employees on a regular basis.

Some considerations

  • The application of the VAT place of supply rules to understand in which country VAT may be due. This could be challenging to conclude upon given that the sample may be obtained in one overseas country, but sent to a laboratory for diagnosis in another country, whilst the parties to the contract may be located elsewhere.
  • Having determined the country whose VAT rules are to be applied there are then further considerations including whether there is an exemption available and the rate of VAT to be applied.
  • Where VAT is due should the supplier VAT register to account for VAT or will the customer apply a ‘reverse charge’ to self-account for the VAT due?
  • If a UK supplier requires multiple VAT registrations in the EU, is there a way to reduce the administrative burden that arises?

R&D and Patent Box

R&D tax credits are really valuable to companies and can offer savings of up to 25% of the qualifying R&D expenditure. Loss-making SMEs and larger companies can also claim a repayment of tax.

Medical testing companies will have had certain products for other purposes, but in order to meet the immediate need and impact of COVID-19 they will have had to innovate. As COVID-19 developed and changed these companies had to respond and adapt to changes in advice and demands from senior medical specialists; they had to adapt their processes and products to ensure that the results were increasingly accurate and produced in a shorter timeframe.

Where these changes constituted an advance in science or technology, resolving uncertainties that a competent engineer in the field could not do easily, this is likely to be R&D activity that qualifies for the tax credits.

Medical testing companies should be seeking specialist tax advice to determine whether they should make a claim for R&D tax credits. These provide valuable tax savings and refunds for qualifying companies.

A number of medical testing companies will have applied for one or more patents for their testing products. Those companies should explore whether they qualify for and would benefit from the patent box. The effect is that profits relating to products containing one or more qualifying patents attract a corporation rate of 10%. A claim cannot be made until the patent has been granted although the benefit can accrue while the patent is ‘pending’ providing the company has made the required elections.

Taking this forward

The development of new innovative products and customer offerings highlights the need to consider the VAT treatment. The impact on margins between having to account for VAT at the standard-rate or not will be considerable and there are often ‘quirks’ in the VAT law which need to be understood. In some cases we have seen that these can be acted upon in the design phase to optimise the preferred VAT treatment. These challenges are increased when considering VAT on cross-border activities as it then means that more than one national VAT system has to be considered and the VAT rules are often not fully aligned.

Recent experiences of HMRC’s policy of the UK VAT treatment of COVID-19 PCR testing services demonstrates that there is often more complexity than suppliers might expect and further developments on this are expected which may then have a consequent impact on other medical testing services delivered using a similar process.

Finally, R&D tax credits and the patent box can be valuable sources of finance for innovative companies. The board of any company should ask two simple questions to a specialist tax adviser – “does the company qualify?” and “how do we make a claim?”.

How we can help

For more information or to discuss any of the points highlighted in this article, please contact Robert Marchant or Stuart Weekes. This article was first published in Forbes in September 2022.


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Contact us

Robert Marchant
Robert Marchant
Partner, VAT and Customs Duty services
Stuart Weekes
Stuart Weekes
Partner, Corporate Tax
Thames Valley