Should I register for VAT?
From 1st May 2007, the VAT exemption is restricted to those services that are intended to principally protect, maintain and restore an individual’s health. However if the purpose of a medical examination or report is to enable a third party to decide a course of action the medical service will be taxable for VAT at 17.5%. Practices whose taxable income for VAT purposes will exceed the VAT threshold of £61,000 will need to register for VAT.
If I belong to a partnership, does each partner need to register for VAT?
No. Only the partnership as a single ‘entity’ or ‘person’ needs to register for VAT.
How do I register for VAT?
You will need to complete a VAT1 form and if the practice is a partnership, you will also need to complete a VAT2 form. These can be downloaded from our website.
When do I need to complete VAT returns?
HM Revenue & Customs (HMRC) will issue quarterly VAT returns, however if your annual value of taxable supplies for VAT is below £1.35m you can opt to join the annual accounting scheme.
What is the annual accounting scheme?
The annual accounting scheme allows you to complete just one VAT return each year instead of completing these quarterly. You would pay an estimate of the VAT over three quarterly payments or nine monthly payments. These must be paid by direct debit, standing order. Once your VAT return has been completed you will then need to pay any balance owed. At the end of the year, you have two months to complete your VAT return and pay any balance owed instead of the normal one month.
To join the scheme you would need to complete an application form, which can be downloaded from our website.
What are the deadlines for submission of VAT returns?
VAT returns need to be submitted to HMRC by the end of the month following the quarter for which the return is prepared. For example, if you are completing a VAT return for the quarter ended 31st July 2007, this will need to be submitted by 31st August 2007. The VAT return clearly shows the quarter(s) they cover.
For annual accounting VAT returns need to be submitted two months following the year end for which the return is prepared.
If VAT returns are submitted late, then this can lead to fines.
Can I ask for VAT returns to match my financial year?
Yes. Tax periods can normally be arranged to fit in with your financial year. We have assumed that all practices would like this and details are given in the covering letter enclosed with this information.
When must I start charging VAT?
You must charge VAT from the date of registration, which will be 1st May 2007. However, you must not charge VAT as a separate item on any invoice that you issue until you know your VAT number.
Do I have to charge VAT on all my income?
No. Health care income for which the purpose is to protect, maintain and restore an individual’s health is exempt from VAT and this is known as an exempt supply.
Drugs or appliances that are personally administered, injected or applied to patients as part of medical treatment are also exempt supplies for VAT purposes.
On what other items must I charge VAT as a taxable supply?
Medical services that are not principally intended to protect, maintain and restore the health of an individual and are primarily for the purpose of enabling a third party to take a decision are now a taxable supply. For example, signing passport applications, undertaking medical assessments and reports for litigation compensation or benefit purposes. Please refer to our website for a detailed list of services.
Should VAT be charged for renting out a room in the surgery?
The rental of any premises is exempt from VAT, however, VAT should be charged on the amount paid for lighting, heating, cleaning and any services provided to the tenant.
How do I charge VAT at standard rate?
The standard rate of VAT is 17.5%. You can either add this to the price of goods so that the money the practice makes does not change or, if you do not want to change the price paid for goods, you will need to calculate the amount of the goods excluding VAT.
For example, if you charge £8 to sign a passport application, the two methods of calculating the VAT are:
Net Amount £8.00
VAT (17.5% x £8) £1.40
Total Price £9.40
Net Amount (£8x 40/47) £6.81
VAT (17.5% x £6.81) £1.19
Total Price £8.00
The VAT amount will be paid over to HMRC when you complete the VAT return. If you charge VAT using the VAT inclusive method, you will be losing the VAT element of this income and this will affect practice profits.
How regularly must I make taxable supplies?
The number of items and the frequency of sales are irrelevant to your VAT registration.
Do I have to make a profit on the products I sell?
Yes. As your activities must constitute a business for VAT purposes, your aim must be to make a profit on the goods you sell.
On what items can I recover VAT?
To reclaim VAT on purchases, you must have a tax invoice made out to the practice or partners.
On what items can I NOT recover VAT?
The main ones are:
· Any item which is not wholly for business use, such as private use of telephone
· Petrol, unless the scale charge is deducted
· Purchase of cars.
Is there a minimum amount of VAT which must be claimed?
No. There is no minimum level.
Can I recover the VAT incurred on overheads?
As doctors provide both exempt and taxable supplies, you cannot recover all of the VAT incurred on overheads. You can only claim an amount that relates to the taxable supplies and this is calculated by using the ‘partial exemption’ method.
How do I calculate the VAT I can recover under the partial exemption method?
There are two types of partial exemption method that can be used; the ‘standard’ method or the ‘special’ method. The ‘standard’ method is a fixed calculation which is suitable for most small businesses. The ‘special’ method needs approval by HMRC.
It is advisable that practices use the standard method which is calculated as follows:
Value of taxable supplies excluding VAT (includes the zero rated supplies) x 100
Total value of supplies in the period excluding VAT
The percentage should be rounded up to a whole number. This percentage is the amount of VAT that can be recovered on overheads.
For example, if you have £20,000 of taxable supplies (standard rated and zero rated) and you have £80,000 of exempt supplies, then you will be able to recover 20% (20,000/100,000 x 100) of the VAT on overheads. The remaining 80% of VAT is irrecoverable as this relates to exempt supplies.
Are there any circumstances where I can recover all of the VAT on overheads?
There is a special rule known as the ‘de-minimis’ limit, which allows you to treat VAT on exempt supplies as if it were a taxable supply and be able to recover the VAT in full.
You can only do this if your exempt tax (VAT on exempt supplies) is not more than £625 per month on average and half of your total input VAT (VAT on all supplies) over the tax period.
How do I account for VAT on cash purchases?
Try to avoid paying for items on which VAT is charged from petty cash. If you do, the amounts are likely to be too small to warrant setting up your petty cash book to allow you to claim. However, if you have good bookkeeping systems in place, you can set up your petty cash book in a similar way to your cash book and include the figures in your VAT workings.
Should I claim for VAT when I receive an invoice or when I pay an invoice?
The normal rules require that you reclaim VAT on purchases you make as soon as you receive a VAT invoice even if you have not paid your supplier. However, you will be able to join the cash accounting scheme if your taxable supplies will be £660,000 or less. Cash accounting means you will be able to reclaim VAT on purchases when you pay your supplier.
Can VAT be reclaimed on any business assets held at the date of registration?
Yes. If you still hold the original VAT invoice for any business assets which have been capitalised, such as fixtures, fittings and office equipment, you can reclaim the VAT under the partial exemption method. If the equipment is used 100% for taxable supplies, then the full amount can be claimed.
Can I claim that certain private activities are conducted personally?
Yes. If lecturing fees and payments for articles are received and retained personally, no VAT will be chargeable.
What records do I need to keep?
Doctors need to maintain their records to support their completed VAT returns and these records need to be kept for six years. HMRC can make enquiries into VAT returns just like they do for tax returns.
What advice would you give regarding the record keeping?
Step 1 - Income
As you will need to use the partial exemption method, you need to be able to identify what income is a taxable supply. This includes zero rated supplies which will be dispensing fees (if applicable) as well as standard rate (17.5%) supplies and what supplies are exempt supplies, e.g. PCT income.
You should post all your income for the month first before posting the expenses.
Step 2 - Calculate the standard ratio for partial exemption
As you can only recover a percentage of the VAT for overheads, it would be advisable to calculate this percentage for the month so you know how much VAT to separate out when calculating your expense.
Step 3 - Expenses
You will need to separate out the VAT on purchases which relate wholly to taxable supplies. However, please remember that VAT on personally administered drugs cannot be claimed, as this is an exempt supply.
Once you know your percentage for the standard method, you can then post the expenses and then split out the percentage of the VAT that can be recovered on your tax return. For example, if you have a stationery invoice for £117.50, which includes £17.50 of VAT and the standard method percentage is 25%, you should only split out 25% of the VAT amount of £17.50, which is £4.38. If you are using a computer package, this may have an option to enter a percentage for VAT. If so, in this example, you would enter 4.375% which is 25% x 17.5%. Please refer to your computer package guidance or helpline.
Copies of all VAT returns and workings should be kept in case HMRC make enquiries into the VAT return.
When will I receive a visit from HM Revenue & Customs?
It is most likely that you will be visited within two years of being registered. After that, the interval between visits will vary depending on the size and complexity of your practice.
What will HM Revenue & Customs require to see when they visit?
They will need to examine your records and accounts. The visit will be a friendly visit and it is nothing to be concerned about. The VAT officer is there to help you and any queries you may still have can be directed to him.