Partial Exemption and VAT For Dispensing Doctors By Andy Newiss

Value Added Tax - History  VAT was a French idea originating in the 1950’s  It is a charge made on the supply of goods and services, with the intention that the cost of the VAT is borne by the end user  VAT is now used by over 130 countries  Pre-requisite before UK joined EEC  Introduced by Sir Edward Heath’s Government on 1 January 1973 at a Standard rate of 10%.  July 1974 – Standard rate reduced to 8%, then after 4 months, a differential rate of 25% introduced on Petrol and Electrical Appliances.

Value Added Tax – History 2 years later the 25% was reduced to 12.5% and was abolished in 1979 when the standard rate was increased to 15% saw the introduction of the reduced rate, set at 8% until Gordon Brown reduced it to the current 5% Recent Standard Rate fluctuations: decrease to 15% increase to 17.5% increase to 20%

Value Added Tax – VAT Basics Types and Rates of VAT Standard 20% Reduced 5% Zero 0%, but taxable supplies Exempt Non taxable VAT registration threshold £74,000 of taxable supplies So, what changed to force Dispensing Practices to register since many were over the £74k limit? The VAT status of PSD re-imbursement changed from being outwith the scope of VAT to zero rated, hence registration at 1 July 2011 was required. The Scottish Government now enjoy HMRC making refunds of VAT rather than NHS Scotland

Value Added Tax – VAT Examples Firm of Accountants Most supplies are standard rated Re-claim VAT on costs, and pay HMRC No net VAT cost to the firm Farmers (say cattle and sheep) Most supplies are Zero Rated (Food) Re-claim VAT on costs, and receive refund from HMRC No net VAT cost to the farmers Insurance Company Supplies are exempt (Not Taxable) No taxable supplies, so cannot VAT register Cannot re-claim any VAT, so have to pass on VAT cost to customers

Value Added Tax – VAT Examples Leisure Centre (Charity) Mixture of Standard and exempt supplies Partial exempt status, above de minimis Can re-claim some VAT on costs, but generally pay HMRC Have to stand cost of irrecoverable VAT Mountain Rescue Team (Charity) Makes no charges taxable or otherwise Cannot be VAT registered Can complete exemption certificates to allow some suppliers to zero rate their supplies (e.g. repairs to Ambulance, purchase of some lighting and radio expenditure) Otherwise VAT is irrecoverable on costs of all equipment and fuel etc

Value Added Tax – Dispensing Practices, Income and Expenses VAT Types Income – VAT types Standard e.g. HGV & Divers’ Medicals Zero e.g. Dispensed Drugs Exempt e.g. GMS Contractual items Outwith Scope VAT refund from HMRC Expenditure – VAT types Standard e.g. Accountancy Fee Reduced e.g. Contraceptives Zero e.g. Water Rates Exempt e.g. Insurance Outwith e.g. Wages

Value Added Tax – Dispensing Practices, Partial Exemption VAT status Income – VAT types Standard e.g. HGV & Divers’ Medicals Taxable Zero e.g. Dispensed Drugs Taxable Exempt e.g. GMS Contractual items Exempt Outwith Scope VAT refund from HMRCOutwith Expenditure – VAT types Standard e.g. Accountancy Fee Partially Taxable Standard e.g. Drug Costs Fully Taxable (FT) Reduced e.g. Contraceptives FT (Exempt PA) Zero e.g. Water Rates Partially Taxable Exempt e.g. Buildings Insurance Partially Taxable Outwith e.g. Wages Outwith

Value Added Tax – Dispensing Practices, Income status Does a Practice charge VAT on a service provided? HMRC document following D’Ambrumenil ECJ ruling Health/Wealth HMRC VAT Notices

Expenditure VAT on 100% Taxable Supplies VAT on 100% Exempt Supplies VAT on partially exempt supplies Fully Claimable (A) Non Claimable Pending De_minimus (B) Non Attributable Input VAT (C) Claimable Proportion (D) None Claimable (E) Reclaimable Irrespective of de minimis rules i.e. (A) and (D) “Standard Method to be used”

Value Added Tax – Dispensing Practices, Partial Exemption Rules The De Minimis Limit Rules You can be treated as fully taxable in any tax period if your exempt input tax is not more than:- (1)£625 per month on average AND (2)half of your total input tax in the relevant period. If your exempt input tax is below the de minimis limit you can treat all your exempt input tax as taxable input tax and recover it all. If, however, your exempt input tax exceeds the de minimis limit, then none of your exempt input tax can be treated as taxable input tax and you cannot recover it.

Value Added Tax – Dispensing Practices, Minimising exposure to irrecoverable VAT Annual Review Required for each year ended 31 March XXXX Can smooth anomalies e.g. Flu Vaccination, and allow VAT re-claim of previously irrecoverable VAT Salaries Adjustment 28.83% of the Global Sum is deemed to relate to staff Some of the 28.83% relates to dispensing staff The proportion relating to dispensing staff can be treated as a taxable supply rather than exempt – this helps the de minimis calculation Rental Reimbursement A proportion of the rental reimbursement can also be treated as relating to dispensing Using a floor area calculation, a proportion of the otherwise exempt income can be treated as taxable to further help the de minimis calculation

Value Added Tax – Dispensing Practices - Miscellaneous points PSD Dispensing reimbursements Reimbursement for items – 2 months in arrears VAT reimbursement – 3 months in arrears (due to data mining time lags) HMRC operation Unco-ordinated and poorly informed/prepared, though helpful Watch use of the VAT helpline PA items

Services provided: Practice sole trader and partnership accounts. Personal tax returns incorporating practice accounts/locum work etc. Annual superannuation certificates. Advice on PMS and GMS contracts. Partnership arrangements such as income sharing and joint ownership of premises. Pension superannuation forecasts based on SPPA contributions. Benchmarking: Comparing your financial results against regional and national averages. Partnership arrangements and contractual changes. Profit shares and drawings where partnership arrangements change. Partnership changes such as retirement. Premises: Financing and tax planning considerations. Claiming reimbursements from the NHS. Accounting for income from different sources such as hospital work, private practice and participation in advisory panels. Advice where a doctor/dentist etc is technically self-employed but participates in the NHS pension scheme. IT and bookkeeping software advice. Tax planning for capital gains tax and inheritance tax. Access to specialist financial advisors such as pension planning and investments. Advice on the best time to change a car and best way to finance it.