HMRC vs Dental Practices – To Be VAT Registered or Not To Be

| 21st August 2015

Since 2006, dentists have been able to incorporate their businesses, and many have chosen to do so because of the benefits it can provide. However, some dentists discovered that the contracts they had with their local NHS trust could not be transferred to the newly created company.

One solution to this problem is to continue to run both the old practice, which can operate the NHS contract, and the new company, which employs the staff, at the same time. The dental work is then subcontracted from the old practice to the new company.

With the old model, practices didn’t have to register for VAT because dental work is classified as the provision of medical care, which is exempt from the tax. However, with the new company structure, the rules become less clear cut. Specifically, it could be argued that it is the existing practice that is providing the dental work, whilst the service the new company offers is that of providing staff (which is not exempt from VAT).

It is this view that HMRC took in their case with City Fresh Services Ltd – a dental practice that utilised the company structure stated above. By arguing that the limited company’s service was to provide staff, they believed it should be VAT registered.

The Tax Tribunal disagreed with HMRC and ruled in favour of the dental practice, as they came to the conclusion that the service that City Fresh Services Ltd provides resembles a supply of exempt medical services more closely than that of a supply of staff. Whilst the ruling of this case doesn’t give all dental practices carte blanche to incorporate and avoid registering for VAT, it does open the door to the possibility.