VAT in check
OT poses a monthly scenario from a practitioner. This month, we look at VAT calculations in practice
Mohammed, AOP member
“I own a small, independent practice and am concerned that I’m paying more VAT to HMRC than some of my peers, who tell me so. My practice is situated close to an RAF base so a number of my patients are trainee pilots, who require sight tests to prove they are safe to fly. I also have a contract with my local Clinical Commissioning Group. How can I make sure I’m not overpaying VAT, but also remain compliant with the law?”
Tamara Habberley, senior VAT consultant, The VAT People
VAT legislation for optical practices is incredibly complex and it is not surprising that so many business owners struggle to navigate the rules and regulations without paying too much or too little to HM Revenue and Customs (HMRC).
The main reason for this complexity is that income from optical practices can be either VATable and exempt from VAT, so business owners must apply complicated calculations in order to work out how much VAT is payable to HMRC.
There are a number of methods that practice owners can use to keep track of their obligations to HMRC, and deciding on which one to use is the first step in getting your VAT in order.
"A VAT expert will be able to assist with the implementation of either method and help you to decide on the best approach on an individual basis"
Examine your current methods
One option is to use the separately disclosed method, where invoices to customers show the split between items that are VATable and those which are not. Sight test services are exempt from VAT, while spectacles, frames and lenses are subject to VAT.
Some practice owners prefer this method as it simplifies the calculations for them and provides a clear record of both types of income stream exists. The commonly perceived drawback is that customers who see the costs broken down in such a way could choose to shop around, and even purchase sight test from one supplier and spectacles from another.
The alternative is to use an apportionment method, which allows practice owners to calculate how much VAT is due after the sale has been made. A customer makes a single payment for the exempt sight test and VATable spectacles, and the practice calculates the amount of VAT they need to declare to HMRC at a later date.
However, the formula for the apportionment method should be revisited every three years, and in line with any changes to the business.
A VAT expert will be able to assist with the implementation of either method and help you to decide on the best approach on an individual basis.
Look at other income streams
Aside from day-to-day sight tests and the sale of spectacles or contact lenses, many practices also have other related income streams. The income from sight tests is only VAT exempted where the primary purpose of a sight test is to care, protect or maintain the health of the patient. Tests carried out primarily for other reasons are VATable.
As you supply sight test services for your local Clinical Commissioning Group, the income from this service will be exempt from VAT because the tests are clearly required for the patients’ health.
Regarding the RAF pilots, as the sight test is required solely to prove the trainee pilot is safe to fly, and thus gain employment in the RAF, HMRC is likely to interpret this as a VATable income for the practice. This is supported by VAT case law, which has confirmed that DVLA sight tests carried out to prove motorists are safe to drive are VATable, and I would advise practice owners not to ignore this point.
"The amount of VAT you pay to HMRC will naturally change year-on-year as your business grows or scales back. I would advise against comparing yourself directly to other businesses, as every circumstance is unique"
It is not possible to claim VAT on costs used to make exempt supplies, subject to certain limits. As practices receive a mixture of VATable and exempt income, there is a restriction on the amount of VAT that they can claim. This results in practices having to carry out complex calculations to recover VAT on costs that they incur. However, it is common for practice owners to misunderstand, or not make these calculations, which may be why some of your peers claim to be (wrongly) paying less VAT than you.
Communicate and review your arrangement
Once you are clear about what elements of your income are VATable and exempt and you know which method you plan to use when keeping track of both income streams, it is important to ensure all staff understand this and record transactions correctly.
It is not uncommon for business owners and their bookkeepers to use accounting systems that do not help make VAT accounting easier for the business. However, there are software packages that can itemise invoices if you choose to use the separately disclosed method, or can assist with the calculations if you use the apportionment method. Either way, a regular review should take place to ensure the agreed method of VAT accounting is still valid and gives the best outcome for the business.
The amount of VAT you pay to HMRC will naturally change year-on-year as your business grows or scales back. I would advise against comparing yourself directly to other businesses, as every circumstance is unique; the only way to ensure you are paying the right amount is to use expert VAT knowledge that looks at your case individually.
About the author
Tamara Habberley is senior VAT consultant at The VAT People, a company that specialises in VAT advice for a number of sectors, including opticians, land and property organisations and financial service providers. For more information, visit the website.
Image credit: Getty