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How will VAT affect the UAE healthcare sector?

* The UAE healthcare sector to reach $28bn (AED103bn) in 2021

* Doctors’ consultation and professional fees are likely to be exempt under VAT

* The list of medicines and medical equipment to be zero-rated is yet to be made available

From January 1, 2018, the UAE will become one of nearly 150 countries to implement value added tax (VAT). As the nation makes strides towards establishing itself as a worldwide leader in healthcare, we examine how the upcoming VAT will affect the sector and residents.

Latest developments

A zero rate of VAT will be applied to both healthcare and education services. Both services were previously exempt from VAT, meaning that input VAT would have been a cost to businesses providing such services. The zero rate will allow such businesses to recover input VAT. The list of medicines and medical equipment to be zero-rated is not available yet.

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Healthcare services could include medical and dental services and extend to room accommodation and meals for patients, prescription drugs and medical equipment supplied to patients in the course of receiving exempt healthcare services; input tax incurred in making these supplies will be irrecoverable.

To complicate matters, many other related services will be subject to VAT. This may include cosmetic surgery, traditional and alternative medicines and therapies (such as reflexology, acupuncture, naturopathy, Chinese medicine), rental of clinics to doctors, room and food for non-patients, car parking fees and televisions rented to patients. In these instances, input tax will be recoverable.

VAT impact on private hospitals

According to a report by PwC, private hospitals in the GCC are likely to make supplies which would be considered as exempt as well as supplies that are subject to VAT. This will mean that VAT incurred on common overheads (such as marketing and promotional costs, utilities, purchases of office furniture and goods) will not be fully claimable and must be apportioned; meaning that only a portion of VAT incurred on such expenses is claimable in proportion to the amount of taxable supplies made over total supplies.

Elsewhere, hospitals in other VAT jurisdictions tend to recover 5-15 per cent of all VAT incurred – so costs are expected to increase for hospitals. These additional costs will affect pricing policy. An early assessment of the VAT cost is necessary to rebalance prices in time for 1 January 2018 to maintain current levels of profitability, pwc says.

The UAE healthcare sector

The $17bn (AED64bn) UAE healthcare sector is set to witness 60 per cent growth to reach $28bn (AED103bn) in 2021 due to an increase in demand for preventive care and digital health, according to a new study by MENA Research Partners (MRP), a leading research firm in the region.

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The current market will be driven by a shift in demand for preventive care, a rise in specialist medical services, efficiently integrated healthcare solutions, and the high growth potential within specific medical devices and pharmaceutical sub-sectors, says the report. Medical tourism and mandatory insurance will also contribute to the sector’s development.

The UAE aims to develop a world-class healthcare system as part of the UAE Vision 2021 National Agenda. To achieve that, the National Agenda highlights the importance of preventive medicine and seeks to reduce lifestyle-related diseases to ensure a longer, healthier life for citizens.

Anthony Hobeika, Chief Executive Officer at MENA Research Partners, said: “The healthcare sector in the UAE is changing fast to adapt to the demands of a younger, more health-conscious population asking for preventive care rather than curative care. The digitally savvy generation is redrawing the blueprints of the future of healthcare in the UAE and looking for a more personalised and specialist healthcare. It is moving more towards interaction and self-management aided by the ever-growing digital technology in the sector.”

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The report’s findings reveal that, while the healthcare market has been growing at over 10 per cent year on year since 2015 and is expected to continue this trajectory, there will be an upsurge of 15 to 25 per cent in some subsectors across the market:

  1. a) Healthcare providers-currently account for 76 per cent of the total market
  2. b) Medical devices-estimated at 6 per cent
  3. c) Pharmaceuticals and life sciences- estimated at 18 per cent

In its report, MRP sized in excess of 20 sub-segments and identified a number of niche areas that health providers need to cater over the next few years.

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Impending challenges

Many hospitals outsource cleaning and laundry services, laboratory services and security services which will all be subject to VAT. As these items are likely inputs for the provision of exempt healthcare services, the input tax acquired on outsourcing will not be claimable and will raise the cost of doing business. Private hospitals need to review the current outsourcing policy and identify for VAT purposes when input tax will (will not) be claimable. And this will decide whether outsourcing will continue to be a cost effective option.

Doctors’ consultation and professional fees are also likely to be exempt under the VAT. Thus doctors too will not be able to recover VAT charged to them, such as VAT charged on rental of clinic rooms.

WARNING: Get insurance in Dubai or pay AED500 fine every month

Editor’s note: AMEinfo will continue to explore VAT and its impact on citizens and businesses. Watch this space for more updates.