The latest “health” related discussion in the VAT Tribunal reports this week related to whether a hair loss replacement system that a taxpayer had devised, could be treated as a Zero rated on the basis that it was a supply to a disabled person of the services of adapting goods to meet the needs of their health condition.
The taxpayer dealt with a range of clients including those who had suffered hair loss following medical treatments including chemotherapy. The service it offered, HMRC felt was different from what would be regarded as a wig. HMRC accept that wigs are regarded as eligible for zero rating when supplied to a person who is chronically sick or disabled – HMRC Public Notice 701/7
However, the hair loss system being offered by the taxpayer fell short of being regarded as a wig. A custom-made wig mask was fitted over the area of hair loss and fixed in place using existing hair but then added to with colour-matched fibre hair which was then styled to suit the client’s appearance. Not a wig in HMRC’s eyes, therefore.
It was then that the meaning of a “disabled” person was considered. Many clients had experienced hair loss as a result of cancer – a serious illness we’d all agree. Still, HMRC distinguished the cause of the hair loss from the hair loss itself, arguing that significant hair loss was not, of itself, a chronic illness.
The First Tier Tribunal fell behind HMRC’s arguments and accepted that, in the letter of the law, the service provided by the taxpayer was not a wig in itself and neither were their services the adaptation of goods (a wig) for a disabled person. Hair loss in isolation was not a disability, nor was it an impairment which affected the everyday activities that the person could undertake, was their view.
Many may well dispute that interpretation, in the same way that many see “cosmetic” health offerings contributing to an improvement in the mental health and general well-being of the individual. However, VAT case after case in the courts, evidences how specifically words and their meaning are to be interpreted and it is in the law that all cases must start – in this instance with the VAT Act, Sch 8 (Zero Rating Schedule), Group 12 (Drugs, Medicines, Aids for the Disabled)
Outside of the technical VAT arguments of the case, it should be noted that the taxpayer had sought VAT advice on the liability of the system that they had devised – which signposted them to the fact that wigs could qualify for zero-rating when supplied to a disabled person. However, this general advice seems not to have explored whether the offering the taxpayer made constituted a wig, or the adaptation of a wigs, and what defined a “disabled person”.
It’s important to have explored with your VAT adviser the full context of what you plan to supply, as this, as well as the nature of your client, can influence the VAT treatment that will be applied. The taxpayer in this instance had been issued with VAT assessments totalling £277,083.10 for the period from Jan 2018. A value that they are unlikely to be able to recover from those past clients.
A harsh ruling by the Tribunal some will say and – as a First Tier Case – it is open to appeal by the taxpayer. It shows, however, that VAT remains a tax of complexity and all clients need to be alert to challenges from HMRC as to how their supplies, especially in this area of health and wellbeing, are being treated.
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