Bob Hutchinson answers questions on VAT sent to PHN
What are the VAT/TAX implications of purchasing clinical equipment (including PCs and software) for a practice? From a TAX/VAT point of view is it better to lease or buy? What exactly is the de minimus rule? Do you rate the method illustrated on the FODO website for calculating the VAT payable on spectacle sales?
OK, let’s take your questions in reverse order.
As you will have guessed I am a devotee of the Full Cost Apportionment Method as shown on the FODO website, not least because it evolved over lengthy discussions I had with Customs as they were called then when I was chairing the VAT group originally for FODO, AOP and ABDO, for the repayment of overpaid VAT when the appeal was won and for the FODO vat committee during which time we agreed the method, I helped write the business brief and the simplified method.
I am a supporter of it because it is still the only recognised method in existence, although that mustn’t and shouldn’t prevent a tax payer coming up with other ideas. At the end of the day we are apportioning the costs of the service of spectacle dispensing against the cost of the goods, and these are all tangible figures that can be trawled from the accounts as long as they are set up to record the appropriate cost centres. Trying to establish time costs over a range of products, patients and services is a nightmare and open to much argument.
There are and always will be arguments about how much time an optometrists spends on dispensing, obviously dependent on how the practice operates. But I have genuinely been able to make a case for some involvement and although some officers try to dismiss it I always argue that an optom will spend time explaining the dispensing options to suit the Px in the consulting room. At least using the FCA means you have a decent amount of common ground to start with.
Partial Exemption and the de minimus rule
Each time a partially exempt business makes a quarterly tax return they must check that they have not broken this ceiling otherwise they will not be able to claim all the input tax back from their non attributable purchases. Every vat registered opticians is partially exempt by virtue of his mixed sales which are:
1. Exempt sales Sight test fees, contact lens fees and extra optometric fee charges.
2. Vatable sales, those that are fully vatable i.e. sunspecs, solutions and accessories
3. Apportioned sales i.e. apportioned spec sales, contact lens product sales and the product part of direct debits for disposable
At the end of the quarter having used your agreed (in writing) apportionment % you will have calculated the total sales (taxable +non taxable) net of vat and the total taxable sales net of vat. The ratio of taxable sales over total sales gives the maximum percentage (rounded up) that you can claim from non attributable sales if you exceed the de minimus. The way practices are moving in terms of greater fee work this figure is going to get smaller so it’s important if you can to stay below the de minimus. Conversely the % of non taxable sales over total sales is you restriction on claiming back input tax on the non attributable.
So, now how do we calculate if we have exceeded the threshold?
The threshold is exceeded if:
The total vat connected to exempt purchases plus the total vat of the non attribs reduced by the restriction % ratio does not exceed £1875 in any quarter
And/or the total vat of non taxable purchases does not exceed 50% of the total purchase tax amount.
If either of these is exceeded in any quarter you can only claim the vat back from attributable goods (goods for resale and purchases connected to selling) plus the reduced % input tax of the non attributable. If over the year you exceed the £7500 annual limit you will have to pay back the whole of the year’s reclaimed non attributable tax that should have been reduced, yes, that’s for each quarter. So don’t make a ****.up of the last quarters return and buy an expensive piece of optometric kit in that quarter outright!
So how do we separate the purchase types? If you set you accounting system up with flags for each type you will save a lot of heartache each quarter.
Attributable purchases: All goods for resale, advertising, publications, frame displays, shop fronts that are linked only to the sale of product only. Shop fitting linked to selling area (PUR A)
Non Attributable purchases: Anything you can’t solely locate to taxable sales., rent heating, lighting, cash registers, POS computer systems, carpets, general shop fitting and repairs etc. (PUR N)
Exempt purchases: Anything purchased to aid an exempt service i.e. optometric equipment, dispensing aids, attachments, light bulbs, batteries, CET courses.
So let’s recap:
Calculate the non taxable % of sales over total sales net of VAT x%
Apply x% to PUR N VAT total and add to PUR E This is your total non attributable and exempt Vat figure. It must be below £1875 in any quarter (and over the year below £7500. It also must not be greater than 50% of all purchase input vat.
At the end of the year you must carry out the procedure for the whole year as one calculation and if it is below £7500 but you had one bad quarter you can reclaim back the restriction, but as already stated if is above you will be losing the reclaim for the year.
Now for purchase implications
It is evident from the above that you must not purchase large pieces of kit outright if you are likely to exceed the de minimus, so leasing is a favoured option. I think your PC might be networked into other admin requirements which would throw it into the Non attributable department so you would get some relief from the non taxable percentage calculation but much of it would be still in the de minimus pot.
Finally a word of warning, do not mix leases with legitimate purchases like frame bars, consulting room shop fitting and equipment. HMRC will make you regard the lease as: at best Non Attributable and at worst exempt. Keep purchase types in separate leasing documents with a written note by the leasing company on each such as sales area shop fitting etc.
We already know that getting the right written agreement of apportionment is vital, but getting this calculation wrong will undo all the good work you have done.
One Further question please:
There appears to me some confusion amongst colleagues about what services and products are exempt from VAT.
Obviously any clinical services are exempt and I assume children’s dispensing is also exempt but what about industrial safety or VDU appliances?
Partly right. Yes all clinical services are exempt but just because the recipient appears to warrant being exempt, i.e. Children’s specs does not mean that they are exempt. All dispensings are subject to apportioned exemption no matter whether we are talking kids, partially sighted, or VDU specs or industrial specs.
Would there be any mileage in charging cost plus a handling charge (on which VAT at the full rate would be charged) for a safety appliance and then a VAT exempt dispensing fee?
The two latter examples of VDU & Industrial specs often carry an exempt fitting fee agreed with the company along with a spectacle charge which I still apportion. Assume a modest non-vatable apportionment figure or 50% it is obviously worthwhile segregating an exempt professional fee and then apportioning the appliance sales cost.
Professional fee £20 exempt, appliance fee £100
Fully vatable your received income would be £103.33
Apportioned you receive £111.67 (a 8 % uplift)
Interestingly only a VAT registered company or business can legally ask you for a VAT receipt.
In the handling charge scenario you are alluding to an old chestnut which has been through to my knowledge two appeals and failed each time. That is to say that HMRC expects every business to make a reasonable profit on the appliance and cost plus, or handling charge or any other name which attempts to sell the product at below a normal market profitability won’t wash.
So at the end of the day the key factor is to get the best apportionment rate you can on frames and lenses and contact lenses and stay if you can below the de minimus to claim all your vat on purchases back. A good POS system is important and I can personally recommend a number that do they job.
Also, what about VAT on low vision appliances? Does it make any difference if the patient is registered SI or SSI?
No once again it is the supplier who follows the rules on applying the vat and the receiver bears no effect. So they all pay unless the products are supplied by a hospital. (Not a 100% sure on this but my memory says that’s the case.)
I tried during my negotiations to include these registered groups as the EU document on VAT refers to Medical Devices as being exempt, but even though the production of spectacles comes under the Medical Devices Agency, they wouldn’t play ball.
About Bob Hutchinson
Bob Hutchinson, optometrist, business consultant and entrepreneur has advised large multi nationals, national and medium sized groups as well as small family businesses.
If you feel a review is needed or need a quick chat about your apportionment agreement made in writing or about to be signed give Eros a call. In every case our costs have been more than paid for by reduced tax often within the first year’s savings. If required we also leave the business with the management tools for greater profitability subsumed in the same costs.
Bob Hutchinson has been working in the centre of the optical sector since becoming an optometrist in the 70’s.
Recently retiring from clinical optometry, he continues to act for many SMEs as well as larger groups in strategy, PR & marketing and financial advice with a specialism in optical VAT.
His client base also includes large industrial companies in equipment and IT involved in the optical industry to name a few.
Still involved in optical decision making his aim has always been to encourage regulators and negotiators to allow the sector to flourish, and to assist others to own and manage financially robust businesses.
Eros Business Consulting