Understanding tax and VAT in aesthetics

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With the self-assessment tax return deadline fast approaching, Hamilton Fraser shares some practical tips to help aesthetic practitioners manage their tax and VAT responsibilities

“Money makes the world go round”, but it can also make your head spin as a business owner. Many medical professionals transitioning into business ownership often find the financial, tax, and VAT obligations challenging. However, navigating the financial aspects of an aesthetic practice is crucial to business success. 

Hamilton Fraser recently created a comprehensive guide to finance, tax, and VAT in aesthetics. Here, they share some of the tips and insights from that report.

Tax returns

Whether you are self-employed or managing a larger clinic, handling tax returns carefully is vital for compliance and maximising deductions.

For any business owner, understanding tax obligations is key. Whether you are self-employed or running a larger clinic, proper handling of tax returns helps you comply with financial regulations and can significantly affect the business’s bottom line through potential deductions and credits. 

Key tax obligations for aesthetic practitioners

• Understanding taxable income: All income generated from aesthetic services, including treatments and product sales, is subject to income tax. It’s crucial to maintain thorough records of all transactions, as this will form the basis of your tax returns
• Deductible expenses: Many expenses incurred in the running of your clinic can be deducted from your taxable income. These include costs related to rent, utilities, equipment purchases, and maintenance, as well as expenses for staff training and salaries. Proper documentation of these expenses is critical for claiming them accurately on your tax returns
• Capital allowances: Investment in clinic equipment can often be counted as a capital expense, which may not be fully deductible in the year of purchase. Instead, these items might be eligible for capital allowances, which allow the cost to be written off against taxable profits over several years. Understanding how to apply these allowances can significantly reduce your tax liability
• Employment taxes: If you employ staff, you’re responsible for deducting income tax and National Insurance contributions from their salaries under the PAYE (Pay As You Earn) system. You also need to make National Insurance contributions, which should be factored into your financial planning
• VAT obligations: Depending on your turnover, you may need to register for VAT. Once registered, you’ll need to charge VAT on applicable services and products, and you can reclaim any VAT you pay on business-related purchases. The distinction between cosmetic and medical treatments can affect VAT charges, as some medical procedures may be exempt.

Practical advice for managing tax returns

• Keep comprehensive records: Maintain detailed and accurate records of all financial transactions, including invoices, receipts, and bank statements. Digital accounting software can facilitate this process and help make sure that all figures are accurate and up-to-date
• Stay informed on tax changes: Tax laws can change frequently, so it’s important to stay updated on any changes that could affect your practice. This may involve consulting with a tax professional or attending relevant training and seminars
• Utilise professional help: Hiring an accountant specialising in medical or aesthetic practice taxation can be highly beneficial. They can provide advice tailored to your specific circumstances, helping to optimise your tax returns and make sure of compliance
• Plan for tax payments: Set aside funds regularly to cover your expected tax bill. This can prevent the financial strain of a large lump sum payment when taxes are due and can help avoid penalties for late payments

Common pitfalls to avoid

• Underreporting income: Report all income, including cash payments and ad hoc services, to avoid penalties.
• Overclaiming expenses: Claim only business-related expenses. Keep personal and business expenses separate to avoid complications with tax authorities
• Ignoring deadlines: Late submission of tax returns can result in penalties and interest charges. Keeping track of all relevant tax deadlines is essential
• Neglecting to update records: Regularly updating financial records can prevent discrepancies and issues during tax filing. This includes updating asset valuations and inventory lists

VAT in the aesthetics sector

VAT can be complex, especially in distinguishing between medical and cosmetic treatments. Read on to find out more. 

Navigating VAT (Value Added Tax) in the aesthetic sector can be a daunting task. VAT applies to most goods and services. In the aesthetics sector, businesses must determine whether their services are taxable or qualify as VAT-exempt medical treatments. 

VAT registration and thresholds

• VAT Registration: All aesthetic practices with a taxable turnover exceeding £90,000 in any 12-month rolling period must register for VAT. This includes income from both cosmetic treatments and other taxable supplies like product sales or training services
• Proactive compliance: Voluntary VAT registration before reaching the threshold can be beneficial. It allows businesses to establish compliance practices early and potentially limit HMRC’s ability to assess VAT obligations retrospectively beyond four years

Distinguishing medical vs. cosmetic treatments

• Legal requirements for exemption: To qualify for VAT exemption, treatments must be provided by a professional registered on a recognised medical register and must be primarily for medical purposes
• Documentation and proof: Accurate documentation is crucial. It’s not enough for a treatment to have a medical aspect; its primary purpose must be medical to qualify for VAT exemption. This means keeping detailed records that demonstrate the medical necessity of each treatment on a patient-by-patient basis

Record-keeping for VAT purposes

• Importance of detailed records: Thorough patient records that clearly document the medical purpose of treatments are essential. This includes detailed notes on the diagnosis, the rationale for deciding on a particular treatment, and how the treatment serves a medical purpose
• Avoiding common pitfalls: A common mistake is the inadequate categorisation of treatments as either exempt or taxable without considering each case’s specifics. The VAT liability must be determined based on the primary purpose of the treatment, supported by clear and detailed evidence

Managing VAT on products and equipment

• VAT on sales: The VAT treatment of products depends on their use. If a product is sold separately from a treatment, it is typically a taxable sale. However, if it is provided as part of an exempt medical treatment, it may also be exempt from VAT.
• Equipment usage: The VAT on expensive equipment like lasers can be recoverable if used solely for taxable cosmetic treatments. If used for both taxable and exempt treatments, only a portion of the VAT can be recovered, depending on the proportion of taxable sales

Strategies for VAT risk management

• Consulting VAT specialists: Given the VAT complexities in the aesthetics sector, working with a VAT specialist familiar with industry-specific challenges is crucial. This makes sure of correct VAT law interpretation and compliance
• Ongoing education and vigilance: Stay informed about VAT requirements and maintain meticulous records. This proactive approach helps in managing VAT risks effectively and means you are compliant with HMRC regulations.

For more insights including business planning, insurance considerations and profit and pricing, read Hamilton Fraser’s comprehensive guide to finance, tax and VAT and comprehensive guide to VAT in the aesthetics sector.

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