How to ‘treat’ VAT implications on diagnostic, testing services

I must have seen a medical drama series like House on TV a bit too much,” I mentioned to a colleague. “Did you know that diagnosis and treatment are two different stages in medical science?”

“And I kept thinking whether diagnostic services are zero-rated under UAE VAT or not,” I continued.

“What do you mean? Tell me more,” my colleague said, looking puzzled.

VAT law

The supply of preventive and basic healthcare services and related goods and services, as specified in the VAT executive regulations are zero-rated. The executive regulations, in turn, defines “healthcare services” to mean any service that is generally accepted in the medical profession as being necessary for the treatment of the recipient including preventive treatment. The aforesaid definition provides that, for zero-rating, the service should generally be accepted as necessary for the (medical) treatment of the service recipient.

Diagnostic services not aiming for medical treatment

Diagnostic services are often important for the treatment of a patient. But a supplier of diagnostic services could face difficulty in determining if the service is necessary for a medical treatment. Diagnostic/testing services could be performed without leading to any future medical treatment.

For example, eyesight testing for obtaining or renewing a driver’s licence does not aim for any medical treatment. Blood tests to simply confirm the blood group type or to confirm the level of certain antibodies are also not aimed for any medical treatment. Even the Covid test for international travelling or attending local events is essentially aimed as an eligibility criteria and not for medical treatment. In fact, individuals seeking Covid test may already be fully vaccinated. Similarly, pre-employment medical check-ups, annual health check packages, etc, fall under the same category.

Therefore, it is not always necessary that all diagnostic services are considered necessary for some medical treatment.

Does preventive treatment cover diagnostic services?

“But doesn’t ‘healthcare services’ include preventive treatment?” my colleague asked. “Yes, it does. But it still refers to a treatment, though preventive.” Preventive treatment should include vaccination for polio, covid, measles, etc, or, say, surgery to remove kidney stones before it causes infection, aimed to prevent diseases in the future.

Position under European law

Under European VAT laws, diagnostic services are indeed exempt as the supply of service consisting in the provision of medical care. However, unlike UAE VAT laws, European laws do not contain a specific definition of ‘medical care’. In the absence of a specific definition, the European Court of Justice has held that the expression ‘medical care’ must be interpreted to cover services which have as their purpose the diagnosis, treatment and, in so far as possible, cure of diseases or health disorders.

FTA’s public clarification

The Federal Tax Authority’s (FTA) Public Clarification VATP016 deals with business-to-business supplies of healthcare services. The clarification gives an example that the supply of medical test services by a laboratory to a patient falls within the definition of “healthcare services” in Article 41 (1).

However, the example covers the scenario where a hospital refers a patient to a laboratory for a medical test which seems to suggest that the individual is already admitted into a hospital. It is not clear if the zero-rating applies because the individual was a patient or because the medical tests services itself are zero-rated. Further, the purpose of VATP016 is to clarify the difference between B2B and B2C healthcare services, and not the scope of healthcare services.

Diagnostic services suppliers are facing the dilemma whether to charge VAT or not. If such services are taxable, the possible financial penalties for not charging VAT could be significant. An appropriate clarification on the on the zero-rating of stand-alone diagnostic/testing services will be immensely helpful to the industry. Alternatively, the suppliers can approach the FTA to seek a clarification on their own.

The writer is the managing director of AskPankaj Tax Consultants. Views expressed are his own and do not reflect the newspaper’s policy.