Dental plan provided VAT-exempt 'payment services' to patients, Tribunal finds

Out-Law News | 06 Dec 2013 | 4:18 pm | 3 min. read

A dental payment plan provided to patients amounts to a 'service for a consideration' for VAT purposes, but also falls within the payment services exemption under the VAT Directive, the First-Tier Tax Tribunal has ruled.

The provider, DPAS Ltd, had purposively restructured its contractual arrangements with patients following a 2010 decision by the Court of Justice of the European Union (CJEU). The CJEU had found that Axa UK, which operated a similar service called Denplan, was liable for VAT at the standard rate because its plans were operated on behalf of dentists. Structured in this way, Denplan's services were essentially those of 'debt collection' and specifically excluded from the exemption.

Following HMRC's announcement that the Axa decision would take effect from 1 January 2012,   DPAS Ltd consulted with professional VAT advisers and changed the structure of its contracts with dentists and patients. The effect of these changes was that although it continued to make supplies of dental payment plans to dentists, which were subject to VAT; it also made some supplies directly to patients.

VAT expert Darren Mellor-Clark of Pinsent Masons, the law firm behind Out-Law.com said that the decision would alleviate concerns that the payment services exemption had been "effectively emasculated" following the widening of the 'debt collection' carve-out in the Axa case.

"This decision appears to echo the footsteps of the Tribunal in the recent NEC case on booking fees, where it was held that HMRC put forward an artificial analysis to arrive at a situation where NEC's activities fell within the ambit of 'debt collection' despite collecting its own money," he said. "The cases seem to reflect a clear line of thought in the Tribunal, with its roots in the CJEU, that 'debt collection' services may only be supplied, as a matter of fact, to the creditor."

"The Tribunal also offered some helpful guidance in terms of the abuse debate, holding both that contract are only the starting point for questions of supply and also that the taxpayer remains free to organise his affairs in a tax efficient manner. In doing so, the Tribunal appeared to be greatly influenced by the reasoning of the Court of Appeal in the Pendragon case: Judge Brooks stated that ultimately the VAT treatment of any transaction must depend upon the circumstances; and further that fiscal neutrality is not fatally offended where there are differing approaches to similar circumstances," he said.

The plans provided by DPAS allow private patients of registered dental practices to spread the cost of basic dental healthcare evenly throughout the year, paid for by way of a monthly direct debit to DPAS from which an administrative fee is deducted. DPAS then accounts to its registered dentists each month for the amount they are due.

The plans were originally packaged so that the patients contracted with their own dentists, and DPAS entered into a separate contract with the dentists for the provision of its services. However, following the Axa judgment DPAS realised its arrangements were no longer sustainable. From 1 January 2012, it split the contract between the patients and the dentists into two so that it was contracting directly with the patients and the dentists. The underlying charges to both patients and dentists remained the same.

In his ruling, Tribunal Judge John Brooks noted that a trader was "entitled to structure his business so as to limit his tax liability", as long as that structure was not artificial or the separate transactions were not objectively a single, indivisible economic supply. In this case, the terms and conditions of the contract made it clear that the patient was contracting with DPAS for management and administration services. In addition, the "economic reality" of the arrangements was that patients were "doing something more than paying for dental services in advance".

Moving on to whether the supplies made to the patients fell within the scope of the payment services exemption, the judge said that it was "necessary to evaluate the service or services supplied as a whole". Although the services had some of the characteristics of those what were classed as 'debt collection' in the Axa case, there was a "crucial distinction" in that the supplies in that case were made to the dentist, who was the creditor.

"In my judgment, debt collection must amount to a service of collecting debts and therefore ... the person to whom the service is supplied is a significant and important factor," he said.

"Although it is clear from Axa that the [payment services] exemption is defined in terms of the nature of the services provided and not in terms of the person supplying or receiving the service, in my view it does not follow that this also applies to an exemption from the exemption such as debt collection services, which must, by definition, be services for the collection of debts and, in my judgment, this can only be performed for a creditor," he said.