Most services provided by doctors’ practices are exempt from value-added tax (VAT). Good news, one would think: no need to charge VAT on most goods and services supplied, and no need to deal with VAT returns, records and inspections.
Additionally, there is no exposure to a swingeing penalty regime that is more widely applied than ever before.
However, one question is often repeated among practices: “How can we reclaim the VAT we are charged?” This is an even more pressing question when the VAT incurred (input tax) is on significant expenditure such as purchasing a property or undertaking a major refurbishment.
The first point to make is that if a practice only makes exempt supplies (of medical services) it is not permitted to register for VAT and consequently cannot recover any input tax. Therefore we must look at the type of supplies a practice may make that are taxable (at the standard or zero rate). Where any of these supplies are made it is possible to VAT register regardless of their value. This is a ‘voluntary registration’ and provides the practice with the ability to reclaim (at least some) input tax. Of course, if the value of these taxable supplies exceeds the current threshold of £73,000 per year then registration is mandatory.
Examples of services and goods that may be taxable are:
- Drugs, medicines or appliances dispensed by doctors to patients for self-administration.
- Dispensing drugs against an NHS prescription is zero-rated.
- Drugs dispensed against private prescriptions are standard-rated.
- Signing passport applications.
- Medicolegal services that are predominately legal rather than medical – for example, negotiating on behalf of a client or appearing in court in the capacity of an advocate.
- Clinical trials or market research services for drug companies that do not involve the care or assessment of a patient.
- Paternity testing.
- Certain rental of rooms.
- Providing professional witness evidence.
- Any services not in respect of the protection, maintenance or restoration of health of a patient.
So what does VAT registration mean?
Once you join the ‘VAT club’ you will be required to file a VAT return on a monthly or quarterly basis. You will have to issue certain documentation to patients/organisations to whom you make VAT-able supplies. You may need to charge VAT at 20% on some services, and the range of services that may become ‘VAT-able’ in the future is likely to grow.
You will be able to reclaim VAT charged to you on purchases and other expenditure subject to partial exemption rules (see below). You will have to keep records in a certain way and your accounting system needs to be able to process specific information.
Because doctors usually provide services that attract varying VAT treatment, a practice will be required to attribute VAT incurred on expenditure (input tax) to each of these categories. Generally speaking, only VAT incurred in respect of zero-rated and standard-rated services may be recovered.
In addition, there will always be input tax which is not attributable to any specific service and relates to ‘overheads’, for instance property costs, professional fees, telephones, etc. The recoverable portion of this VAT is calculated in a set way. VAT registered entities that make both taxable and exempt supplies are deemed ‘partly exempt’ and must carry out calculations on every VAT return.
Once the calculations described above have been carried out, the resultant amount of input tax that relates to exempt supplies is compared to the ‘de minimis limits’ (broadly £625 per month VAT and not more than 50% of all input tax). If the figure falls below these limits, all VAT incurred is recoverable, regardless of what activities the practice is involved in.
Therefore any accounting system must be capable of attributing input tax below the following headings: taxable (at 20% or zero); exempt; and overhead (attributable to both taxable and exempt).
How to register
Practices will need to consider how they should be registered – for example, individually, as sole proprietors or jointly as partnerships. The legal entity chosen should reflect actual working arrangements, so if several doctors work together in a practice, they would normally be registered together as a partnership.
VAT registration will cover all supplies made by the doctors involved in the registered legal entity – eg, if a doctor is registered as a sole proprietor, all the income he/she receives for both medical and non-medical purposes would be subject to the VAT rules relating to such supplies. It may also be possible to register as a company or LLP depending on the practice structure and associated entities.
Registration may be applied for using a form VAT1 online (see Resource).
Specific VAT issues for property transactions
If possible, it would obviously be preferable to purchase a property without VAT. These properties are likely to be older buildings, as new commercial properties (under three years old) will be mandatorily standard rated. If the property being purchased is residential, it will be VAT free. It is also possible for a vendor to ‘opt to tax’ a commercial property, meaning that a unilateral choice has been made to add VAT to the sale price. If the property is subject to VAT on the sale or long lease then we must consider the ability to recover this.
Assuming a VAT registration is in place for a practice, the VAT on the purchase will be an ‘overhead’ for partial exemption purposes so the input tax will feed into the partial exemption calculation and some of it will be recoverable. If the property is worth more than £250,000, something known as the ‘Capital Goods Scheme’ will apply and the amount of input tax claimed will need to be adjusted annually over a 10-year period.
If part of the property is to be sub-let to a third party,
it is possible for the practice to opt to tax the rent. This
will improve the practice’s ability to recover input tax on the purchase.
Alternatively, a third-party entity (eg, a company, an LLP or an individual doctor) may purchase the property, VAT register, opt to tax the building itself and charge rent to the practice that uses the property. This means the purchasing party may immediately recover 100% of the VAT incurred on the purchase, but will need to add VAT to the rent to the practice. Care should be taken with a structure such as this and professional help should be sought.
The sale of a property will be VAT-able if it has been subject to the option to tax, and exempt if there is no option and the property is more than three years old. If the property were purchased by a third party (as above) it may be possible to treat the sale of the building as a VAT-free ‘transfer of a going concern’.
As may be seen, VAT is not straightforward for GP practices. However, it is worthwhile looking to see if it is possible to reduce or mitigate the actual cost that VAT represents to practices.
Marcus Ward is Director of VAT at Price Bailey LLP and heads up the firm’s VAT Practice.
HM Revenue & Customs – How to register for VAT