Result: Approximately £11.50 million recovered

A major UK healthcare and diagnostic services provider engaged Proactive Consultancy Group to review the historic VAT treatment of services supplied during a period of exceptional growth.

Our review identified a substantial historic VAT overpayment. However, establishing the client’s entitlement to repayment became one of the most technically and evidentially complex VAT cases our team has handled, involving 14 rounds of correspondence and detailed representations with HMRC before the matter was successfully resolved.

Key Case Facts

Sector: Healthcare & Diagnostics

Issue: Historic VAT treatment of diagnostic and screening services

Technical areas: Healthcare exemption, partial exemption, Principal Purpose Test, RHP supervision, error correction and historic VAT reconstruction

HMRC engagement: 14 rounds of correspondence and representations

Outcome:Approximately £11 million VAT recovered

The Challenge

During a period of unprecedented demand, the client had rapidly expanded its diagnostic testing operations across the UK. Its services included both testing supplied directly to individual consumers and large-scale screening programmes supplied to corporate customers.

The business had historically applied VAT inconsistently to certain consumer diagnostic services. Our review identified that qualifying diagnostic services provided to individuals had been treated as standard-rated when they should have fallen within the healthcare exemption.

Correcting the position was far from a simple exercise.

The relevant periods contained a mixture of exempt and taxable supplies, substantial volumes of transactions, changes in accounting systems and incomplete historic VAT workings. Some input VAT had been underclaimed, certain historic adjustments could not be reconstructed from the client’s original records, and partial exemption calculations had to be rebuilt.

For one VAT quarter alone, the underlying sales records exceeded £60 million, illustrating the scale of the reconciliation exercise.

HMRC consequently undertook an extensive review of the Error Correction Notice and requested detailed explanations concerning output VAT, input VAT, partial exemption, historic adjustments, transaction reconciliations and the evidence supporting the healthcare exemption.

Our Approach

Rather than attempting to defend the historic VAT records in their existing form, we effectively rebuilt the client’s VAT position from first principles.

Our team carried out a detailed transaction-level review of the relevant periods, reconstructed output and input VAT, reassessed the partial exemption position and reconciled the revised calculations against the underlying accounting records.

As the review progressed, additional historic issues were identified and corrected, including input VAT discrepancies, tax-point issues and reverse-charge VAT. The objective was not simply to maximise the refund but to ensure that the final submission represented a complete and technically defensible VAT position.

Where the original business could no longer provide supporting calculations for a previous adjustment of approximately £884,000, we did not rely upon unsupported historic workings. Instead, the affected VAT periods were rebuilt using underlying transactions, supplier documentation and the correct VAT treatment.

A Critical Technical Challenge

A particularly significant issue emerged during HMRC’s review.

While HMRC accepted that qualifying consumer diagnostic testing satisfied the conditions for VAT exemption, it subsequently questioned whether the client’s corporate screening services should also have been exempt.

This distinction was critical.

The corporate services had been treated as taxable. If HMRC’s alternative interpretation had prevailed, the client’s taxable turnover would have reduced substantially and its entitlement to recover residual input VAT under partial exemption would also have been adversely affected.

HMRC initially considered there to be insufficient evidence of a material distinction between the two operating models and proposed that the corporate testing services should also fall within the healthcare exemption.

We disagreed.

Our analysis demonstrated that the two supplies were fundamentally different.

Consumer testing operated as an individual diagnostic service, with registered healthcare professionals involved at clinically relevant stages and results provided as part of an individual testing pathway.

Corporate testing, by contrast, was primarily structured as large-scale workplace and event screening. The purpose was operational risk management and business continuity rather than the diagnosis or treatment of an individual patient.

Building the Evidence

Technical argument alone was not enough.

We worked with the client to reconstruct how the business had actually operated during the relevant periods and assembled contemporaneous evidence demonstrating the distinction between the two service models.

This included operating procedures, laboratory staffing records, organisational structures, reporting processes, historic documentation and evidence concerning the involvement of Registered Healthcare Professionals.

For the majority of the corporate screening activity, dedicated laboratories were staffed by non-clinical scientists and operated independently from the consumer diagnostic infrastructure. Even where infrastructure was shared, separate batching, staffing and reporting processes were maintained.

The evidence also demonstrated that corporate screening was routinely performed irrespective of symptoms, with results generally used by employers and event organisers to manage access and operational continuity rather than to provide individual clinical care.

Our submissions therefore addressed both elements of the healthcare exemption analysis: whether the services were performed by or directly supervised by Registered Healthcare Professionals, and whether the principal purpose of the supply was the protection, maintenance or restoration of the individual’s health.

Fourteen Rounds With HMRC

The case developed through 14 rounds of detailed correspondence, calculations, evidence requests and technical representations with HMRC.

The review went considerably beyond the original VAT exemption question and included examination of:

  • healthcare exemption criteria;
  • the distinction between consumer diagnostic testing and corporate screening;
  • Registered Healthcare Professional involvement and supervision;
  • the Principal Purpose Test;
  • partial exemption and attribution of input VAT;
  • historic Error Correction Notices;
  • transaction-level sales and purchase reconciliations;
  • input VAT underclaims;
  • supplier tax points;
  • reverse-charge VAT; and
  • historic accounting and VAT-control weaknesses.

At various stages, calculations were revised as additional underlying data became available. For example, a detailed reconstruction of one quarter identified additional overdeclared output VAT while simultaneously reducing the partial exemption recovery rate, requiring both sides of the VAT calculation to be recalculated rather than simply increasing the claim.

This was therefore not simply a refund application. It became a comprehensive reconstruction and defence of the client’s historic VAT position.

The Result

Following the extensive HMRC review and our repeated technical and evidential submissions, the case was successfully resolved.

The client received a VAT refund of approximately: £11.50 million

The outcome demonstrates the importance of looking beyond how VAT was historically accounted for and examining the underlying nature, purpose and delivery of the supply.

It also demonstrates that substantial VAT recoveries frequently require much more than identifying an error. In complex cases, the entitlement must be capable of surviving detailed HMRC scrutiny across legislation, accounting records, operational evidence and historic business practices.

Beyond the Refund

Our work also helped the business identify weaknesses in its historic VAT governance that had developed during a period of rapid expansion.

The review highlighted inconsistencies in VAT classification, partial exemption procedures, accounting-system treatment and historic record keeping. The business subsequently strengthened its internal VAT controls and compliance processes.

For Proactive Consultancy Group, the engagement illustrates our approach to complex VAT recovery work: identify the opportunity, reconstruct the underlying tax position, develop the technical argument, build the evidence and remain engaged through HMRC scrutiny until the matter is resolved.