Health tourism and VAT
The health tourism business is an interesting area because it combines three types of VAT supplies:
- exempt services (the provision of health services is usually an exempt supply)
- standard rate services (for example, commissions charged)
- TOMS services (for example hotels & the like)
This note looks at some of the issues involved.
Tour Operators Management Scheme (TOMS)
The Tour Operators Management Scheme (TOMS) is a special VAT scheme that applies to businesses that buy and then sell travel and accommodation services. If you are a director of a health tourism business then it will be important to you because:
- There are special rules that need to be followed if you fall under TOMS (as a director, you need to have at least a basic understanding of them)
- Calculating VAT using TOMS is more complicated than calculating VAT in the normal way, which means higher administrative costs for your business.
When you need to apply TOMS
The best way to describe TOMs is to give you a couple of examples, In these examples, imagine that there are three parties:
- Ritz Hotel (which provides accommodation)
- Health Tourism Ltd (your company)
- Mrs Bianchi (Health Tourism Ltd’s client)
Note that for the purpose of this blog, Health Tourism Ltd is an imaginary company.
Situation 1: A situation where Health Tourism Ltd would need to operate TOMs
Imagine that Mrs Bianchi comes to the UK for an operation and also stays in the Ritz for a few days. You organise things so that:
- The Ritz Hotel invoices Opportunity World
- Health Tourism Ltd pays Ritz’s invoice
- Health Tourism Ltd includes the cost of the Ritz in its invoice to Mrs Binachi
In this case, Health Tourism is acting as either a principal or an undisclosed agent and TOMS needs to be applied.
Situation 2: A situation where Health Tourism Ltd would not need to operate TOMs
The situation is the same (Mrs Bianchi comes to the UK for an operation and stays in the Ritz). However, in this case, you organise things differently, so that:
- The Ritz makes the invoice out to Mrs Bianchi
- The Ritz gives the invoice to Health Tourism Ltd
- Health Tourism Ltd pays the invoice on Mrs Bianchi’s behalf
- Health Tourism Ltd invoices Mrs Bianchi for the hotel cost and adds a commission for organising the accommodation
In this case, you are acting as a disclosed agent for Mrs Bianchi and does not need to operate TOMS.
Acting as an agent rather than as a principle
From the above examples, it should be evident that Health Tourism needs to be a disclosed agent for TOMS not to apply. There are two main aspects to this:
- Health Tourism Ltd needs to be an agent of its client (in the case above, Mrs Bioanchi)
- Health Tourism Ltd needs to disclose this agency to the provider of the accommodation (in the case above, the Ritz)
Agency law is a complicated area. We are accountants, not lawyers. Therefore, this is outside of our area expertise. However, in very broad terms, in the case described above the best way for Health Tourism to be considered as an agent is for this to be expressly stated in its contract with its client (Mrs Bianchi). The fact that Health Tourism is an agent also needs to be told to its supplier of the services (The Ritz). In this way, Health Tourism has express authority to act as its client’s agent and this is disclosed to the service provider. Hence, Health Tourism Ltd is a disclosed agent.
Fiduciary duties of agents
A basic principle of law is that an agent should not abuse his or her position. The agent is said to be a fiduciary and is said to owe fiduciary duties to his principal. This means that agents have a duty of loyalty and a duty of care toward their principals. In Situation 2 above Health Tourism Ltd will have these duties toward Mrs Bianchi.
What does being a fiduciary duty mean?
A fiduciary duty is often described as a duty of trust and confidence, which means that the fiduciary has a duty of loyalty and a duty of care to its principle. The precise meaning of this depends on the situation, however, there are some common themes. Namely:
- Duty of loyalty – A duty of loyalty means that the agent can’t put his own interests ahead of those of his principal. The agent must avoid conflicts of interest and must act in his principal’s best interests. For Health Tourism Ltd one implication of this is that it must be transparent with its client. For example, it should disclose the cost of the hotel to Mrs Bianchi.
- Duty of care – A duty of care, in this context, is a duty to act sensibly and be objective. It doesn’t mean never making a mistake, but it does mean following normal processes and acting thoughtfully. For Health Tourism this means, for example, that it needs to choose a hotel that is suitable for its client.
- Violation – If Health Tourism Ltd violates a fiduciary duty it is likely that it will be personally liable. To avoid this, a fiduciary who commits a breach should tell the principal so that the principal can authorise the breach or, if necessary, act to remedy it. For Health Tourism Ltd this means that if it makes a mistake it needs to tell its client about the mistake.
As I said before, we are not lawyers and have no particular expertise in this area. The points above are meant to indicate some considerations and give you a flavour of the issues. It is, of course, always advisable to take legal advice on the precise issues involved.
How to avoid falling under TOMs
So, if you Health Tourism Ltd wants to avoid operating TOMS, it needs to conduct itself so that it is a disclosed agent. In practice, this means that it should:
- have a clear contract that explicitly says that Health Tourism Ltd is acting as an agent for its client (Mrs Bianchi)
- the contract should define the commissions that Health Tourism Ltd is able to charge Mrs Binachi on arranging accommodation and other services
- The Ritza should make its invoices out to Mrs Bianchi, not to Health Tourism Ltd
- Health Tourism Ltd should treat accommodation and other related costs as disbursements made on behalf of its clients. Amongst other matters, this means that they should be itemised and shown separately on Health Tourism Ltd’s sales invoices
Another point of interest – VAT Exempt items
Health services, such as operations, are usually exempt for VAT purposes. Exempt services are services that you can’t charge VAT on. Health Tourism Ltd buys in and sells exempt items (such as medical operations). It shouldn’t claim back VAT on these items and shouldn’t charge VAT on these items. So, these items need to be shown separately on its’ sales invoices. An implication of this is that when deciding on the obligation to register for VAT the sales value of these items does not need to be considered. I talk more about VAT registration in my note Types of UK VAT Registration.
What services fall under TOMS
TOMS applies to Health Tourism Ltd if it buys and resells travel and accommodation services as a principal or undisclosed agent. TOMS does not apply to:
- supplies arranged as a disclosed agent or intermediary where Health Tourism Ltd’s commission is readily identifiable
- supplies that are incidental to Health Tourism Ltd’s other supplies
Incidental means that total gross total turnover from these supplies to be less than 1% of Health Tourism Ltd’s gross turnover. It seems to me that an overnight stay in a clinic would not be covered by TOMS as it is not similar accommodation to a hotel. This matter is discussed in HMRCs VAT Notice 709/3 and is explained in HMRC’s Land and Property Manual (VAT LP 11000).
Health tourism and VAT The health tourism business is an interesting area because it combines three types of VAT supplies: exempt services (the provision of health services is usually an exempt supply) standard rate services (for example, commissions charged) TOMS services (for example hotels & the like) This note looks at some of the issues […]