The issue of the VAT rate for medical devices has been the subject of discussion for many years. Currently, most EU countries apply a reduced VAT rate to medical devices. However, the classification of which products may be subject to the reduced rate, and which no longer qualify for it, remains controversial, says Pawel Ossowski, Vice-President of the Management Board and Managing Director of ZARYS International Group, a manufacturer and distributor of medical equipment, in an interview with PMR.
Poland: 15 p.p. of difference between VAT rates
Paweł Ossowski recalls the judgment of the Court of Justice of the European Union (CJEU) of 4 June 2015, which stated that Poland has violated EU regulations by applying a preferential VAT rate to too broad a range of products. Two years earlier, Spain found itself in a similar situation, where the European Commission accused it of applying a reduced VAT rate to products that do not meet the conditions of the Medical Devices Directive.
“In the case of Poland, the difference is as much as 15 percentage points and from the point of view of potential buyers of this assortment, i.e. hospitals, is crucial as they are not subject to value added tax and operate in gross prices” – stresses Mr Ossowski.
Which VAT rate on the same products, in different procedures?
Another important issue is the application of different VAT rates to the same products but used in different procedures. Examples include medical devices such as gloves and disposable absorbent primers. Both products are widely used in medicine and are used in virtually every healthcare facility. “However, gloves are equally widely used in the food, cosmetics and even automotive industries. So are the primers that can be found in virtually every veterinary clinic. Then, according to the letter of the law, this assortment should be sold at the normal 23% VAT rate” – says Mr Ossowski.
The problem of applying different VAT rates does not apply only to Poland
The distinction between the use of medical devices in aesthetic surgery and cosmetology is also becoming increasingly controversial. Should a reduced or standard VAT rate apply to the use of medicines or medical devices for aesthetic surgery? This was a dispute with the Belgian government involving the medical community and private clinics of aesthetic surgery in Belgium, which took the view that a reduced VAT rate should apply in both cases. “This dispute shows that the problem of applying different rates to the same product does not only exist in Poland” – emphasises Pawel Ossowski.
The CJEU judgment of 27 June 2019 maintains the Belgian government’s position and clearly allows for different VAT rates depending on the use of the product. “This will unfortunately lead to further misunderstandings and ambiguities. At the moment, the obligation to verify whether medical equipment or medicines go through strictly medical procedures rests with the wholesaler or manufacturer” – says the director of ZARYS International Group.
A necessary change in the VAT rate in the distribution process
In addition, the key issue is to change the VAT rate during the sales process when a wholesaler buys a product at a reduced rate from a manufacturer of a medical device, and then should sell it at the standard rate if the assortment goes to a non-health end customer. “This is obviously disadvantageous for the entrepreneur, as a 15 p.p. difference in tax is created. It is already known that the tax office has questioned the reduced VAT rate for the gloves and liners mentioned above that were marketed outside the medical market and claimed the missing VAT” – stresses Mr Ossowski.
The judgment of the CJEU will deepen this unclear state of affairs and, in the case of an increasingly difficult budgetary situation, it may be a tool for collecting additional funds from entrepreneurs. “The simplest and most suggested solution would be to lower the standard VAT rate to the levels accepted by the European Union and not to apply any exceptions. This would definitely simplify the tax system and would not create any scope for abuse by government departments or businesses” – ends ZARYS’s Director.