VAT for online dental business

[Jm4910]

Hi there,

I have a new online business connecting dental patients with emergency dentists. Dentists and dental examinations/treatment is exempt from VAT as I’m sure you’re aware.

Patients book their dental appointment through my website by paying the examination fee. We take the payment and then the practice raise an invoice for their portion. We take £20 as a commission. If for example the exam fee is £100, do I have to charge the patient £120 Inc vat? Or do I only have to charge VAT on the £20 commission as the £80 is for a VAT exempt dental examination?

Thanks

[VAT-adviser]

The service you provide involves three parties (principal, agent or customer) and hence you need to have robust agreements that make it clear to the client that you are an agent (disclosed agent) and in that case you only charge VAT on the £20 commission and the £80 is exempt. If not disclosed to the client, then you will be acting as principal, and VAT on the £120 is chargeable.

The other argument you can make is whether what you are providing is directly linked to the provision of dental services – depending on what you exactly provide!. However, per AXA Denplan VAT case, where AXA Denplan was merely arranging payments between dental customers and dentists argued their services were an exempt supply of payment or transfer services but rather the courts ruled that it was a standard-rated administrative service.

[Trevor S]

It’s not just VAT, there are other reasons why you need good contractual documentation showing that your role is just acting as an agent in introducing the patient and dentist. For example, what would happen if the patient was unhappy with the treatment – or the dentist did something wrong? Without any documentation proving otherwise, the assumption may be that you’re the supplier of dental services to the patient – making you potentially liable for any claims.

Also in the documentation – make it clear who you’re acting as agent for. I.e. if you’re the patients’ agent, they are receiving both a supply of treatment from the dentist and a supply of introduction/booking services from you. But if you’re the dentists’ agent, the patients’ are only receiving a supply of treatment from the dentist, and the dentist receives the supply of the introduction/booking service from you. The only impact of this is on who you would need to issue your VAT invoice/receipt to. As dentists’ supplies are predominantly exempt, it is unlikely that they would be VAT registered, so would be unable to reclaim any of the VAT they are charged.

I actually believe that if you were regarded as the supplier of the dental services to the patient (i.e. you were acting as principal), your whole charge to the patient would be VAT exempt – you wouldn’t need to charge VAT on any of it. In the VAT Act 1994, schedule 9, group 7, item 2 exempts treatment by registered dentists – but note 2 to the same group exempts supplies by those without the appropriate medical registrations, provided that the actual work is carried out by a registered person. So just from a VAT perspective alone, you may be better off if you weren’t just acting as an agent. But the risks of being responsible for the dentists’ work would probably outweigh the VAT benefit – it’s safer to make sure that you’re just the agent, and declare VAT on the commission element.

[Jm4910]

Thank you both for your detailed responses. It helps me a lot. I clicked on the “disclosed agent” link and at the bottom of that web page it said this:

“Where agents using 47(3) are involved with zero-rated supplies, they may zero rate their supply to the buyer if that supply would have been zero rated had the principal made it direct. An example might be where an agent passes on zero rated construction services on behalf of his principal. The principal would normally be entitled to zero-rate the supply, but cannot because that supply is now to an agent not directly involved in the construction. The principal must therefore charge output tax to the agent, but the agent may zero-rate the onward supply.

 

In this situation, the agent may reclaim the input tax on the principal’s supply to him; but this is not actually his input tax. He must therefore refund it to the principal; if he does not, the input tax retained is further consideration for his agency services. This is a separate supply on which tax is normally due.”

So do I understand it correctly that the business would firstly take the £100 payment (+ VAT on the £20 commission) from the patient, so £104. The dentist would then invoice my business for £80 + vat, so £96 but I can then claim a refund on the VAT from them? How can this happen if dentists aren’t registered for VAT? Or is it just a case of them not adding VAT in the first place? 

Thanks 

[VAT-adviser]

Disclosed agent can be viewed as two separate transactions though you may be collecting the money and passing it to the principal.  Ie you charge £20 plus VAT £4 and the principal charges £80 (exempt) = total £104; and you pass the £80 to the principal. You pay £4 to the VAT man.

[Jm4910]

That’s great. Certainly clears everything up for me. May I ask, do I only need to include the commission and not the exam fee to the dentist when calculating whether I need to register for VAT? If my commission is less than £85k in 12 months then I don’t need to charge vat, even if I’ve received full payment of the vat exempt examination fees too (before transferring to the dentist?

Hope that makes sense.

[Trevor S]

If you are acting as an agent (as in VAT-adviser’s reply), only your commission counts towards the £85k registration threshold.  So at £20 per referral, you would need to be making 4,250 referrals per year before you need to register for VAT.

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