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VAT to basics: how to deal with the VAT conundrum

1 November 2007

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Adam Armstrong
Finance Manager
Manor House Surgery, Glossop

Adam is the payroll and finance manager at Manor House Surgery in Glossop. An avid music follower, he also enjoys reading, learning languages, rugby, and has been a Buddhist for 11 years

“… The situation is that you can only claim back the output VAT relating either directly to your input VAT, or the percentage of your output VAT from your indirectly attributable expenditure in accordance to the percentage of your input VAT …”

And so the conversation with the VAT office went on, and my hairline started to resemble the icecaps, receding at an exponential rate. It’s not that I have never dealt with VAT before (I come from a finance background) – I have just never been subjected to the terrors of “partial exemption” before.

Manor House Surgery is a two-site practice catering for 16,000 patients in the area known as Glossopdale – “the gateway to the Peak District” in Derbyshire. We have many inhouse services, and a private complementary therapy business, as well as providing private occupational health services to some local employers.

When the announcement came that the VAT registration process was going to be delayed a year, we breathed a huge sigh of relief. Not only because it put everything on hold for another year, but we thought that there would be some definitive guidance issued in the following months that would enable people to make the changeover properly.

As usual with these things, we should have known it would be more complicated than that!

Making an exemption?
In March this year, I started to call HM Revenue & Customs (HMRC) to find out exactly what we should be charging VAT on. The answer was that any reports that promote or protect the health of an individual would be exempt from VAT, and those reports that just allow someone to make a decision would be vatable.

So Driver and Vehicle Licensing Agency (DVLA) reports, Department of Social Security (DSS) reports and certain occupational health reports would be subject to VAT. I took this to mean that insurance reports would also be subject to VAT, but on closer inspection it seemed they wouldn’t be.

I eventually turned to the online VAT manual and trawled through the pages, where it became apparent that insurance reports are exempt from VAT under the current insurance industry exemption.

However, the exemption was pending the outcome of a case going through the European court. This case had already been heard, and the decision was made that the insurance exemption was too wide and that it needed revising. This decision was made in 2004.

I then went back to HMRC, who weren’t aware of this and had to consult the experts. It now seems that the delay to amending the insurance industry exemption is tied in with the exemption for financial services, for which a case is currently proceeding through the European courts. Once a judgement has been reached on this, the entire insurance and financial services exemption will be rewritten.

The next bit made me laugh, though – if we want to, we can either wait for the UK to rewrite the law (and therefore not charge VAT on insurance reports), or we can take the European Commission’s judgement as fact and start adding 17.5% to the price. So the decision is up to us!

Ref requests, receipts and rates
Throughout all of this, I was thanking my lucky stars that we had recently bought a decent bit of accounting software. It’s only when you start delving that you realise just how fundamentally this will affect the way your practice finances are run. VAT invoices need to show the registered VAT address, be sequentially numbered and have the rate and amount of VAT chargeable shown.

Now, at our practice, whenever we processed our requests for medical reports we used to just send a letter detailing the cost of the report, and that sufficed as an invoice. But now everything needs to come through the finance assistant and me so that we can issue a proper VAT invoice.

All those short reports or reference requests that the GPs used to complete and leave at the desk with “£10 charge” written on the envelope need to have a VAT receipt given or, in our case, we attach a VAT invoice as a receipt. We have now completely redesigned our processes to cater for this, and have even invested in a till for the main surgery reception desk, which can issue VAT receipts in an attempt to reduce the amount of
paperwork involved.

Another interesting thing about VAT is that there are five “rates” or categories:

  • Outside the scope of VAT.
  • Exempt.
  • Zero-rated.
  • Discounted.
  • Standard rate.

In fact, there are lots of rates, but many of them are unused. The above five rates are, in percentage terms, 0%, 0%, 0%, 5% and 17.5% respectively. There is a big difference between zero-rated, exempt and outside the scope, so you will need to make sure you understand these.

It will make a big difference to what you need to include on your VAT returns. The VAT guide (available from the HMRC website, see Resource) will help you with this.

Hints and TIPs
Now back to the opening line. This is where it gets really fun!

NHS income is exempt from VAT. Some medical reports are standard rate (as, for example, is our complementary therapy, because of the way it is charged for). The percentage of our standard rate income out of our total income is our taxable income percentage (TIP).

Total income does not include anything that is “outside the scope of VAT”, such as medical records copies. When entering purchase invoices, we need to decide at the time of input how the invoice relates to our business. If there is VAT on it, there is a choice of whether the VAT is directly attributable to our vatable income (ie, couch rolls and other materials we buy for our complementary therapy business are directly attributable), whether it is directly attributable to our exempt income (ie, buying drugs, minor surgery equipment, etc) or whether it is neither (for example gas, electric, telephones, etc).

In order to calculate how much VAT you can claim back, you can claim 100% of the VAT relating to your vatable income, 0% of the VAT of the exempt income and x% of the vat which is “indirectly attributable”, where x is the value of your TIP as above.

Still with me? If this wasn’t complicated enough, you have to do this every quarter, and then at the end of the VAT year you need to do an annual adjustment, taking into account the entire year’s income and expenditure to ensure the correct amount has been taken into account.

This could be particularly difficult for GP practices that receive a large part of their income stream in one lump sum (ie, the Quality and Outcomes Framework), as it could mean an extra-large VAT bill if this falls in your last VAT quarter, due to the fact that your TIP will decrease with the annual adjustment and therefore you won’t be able to claim back as much VAT as you would normally – and may even have to repay some that you have already claimed back.

Of course, the reporting deadlines for VAT reporting are very tight, and if you do not report the figures to HMRC by the end of the month following the VAT quarter, you risk being fined. If you were due to have a VAT refund for some reason, you also would not receive it.

VAT inspections are on the increase, so if you have claimed for something you shouldn’t have (such as that chair you bought for £150 including VAT, but you couldn’t find the invoice and so put it on the accounts anyway), you will find that the “vatman” will want you to pay back any VAT reclaimed on that invoice until you can prove that it was reclaimable.

Practical pointers
My top tips for preparing for VAT (if you haven’t already had to register) are:

  • Review your potentially vatable income regularly. You never know when you might go over the threshold.
  • Keep an eye out in the press for items that lose exempt status and become standard rate.
  • If you haven’t done so already, invest in a good accounts package to keep your work to a minimum.
  • Look at your work processes. Could they survive having VAT introduced?
  • Get a copy of the VAT guide from HMRC, and have a read through it to familiarise yourself with VAT in general.

Tips for those recently registered are:

  • Keep on top of your paperwork and file it away religiously.
  • Make sure you allocate income and expenditure correctly.
  • If your systems or processes aren’t helping you, change them.
  • If you aren’t sure, get advice from your accountant. If they aren’t sure, think about getting a new one!
  • Don’t forget that NHS income is exempt – not zero-rated or outside the scope of VAT.
  • Ensure you are fully aware of the meaning of “outside the scope of VAT”, “exempt from VAT” and “zero-rated”, as this will have a major impact on what you report to HMRC.
  • Check your purchase invoices regularly to make sure you have none missing. If you do, request copies from the supplier.

Keep the reports!
The other bit of bad news is that, since the reports are evidence for VAT, you will need to keep a copy of the reports for VAT purposes for six years, plus the current financial year (seven years in total). If you get a VAT inspection, you may be asked for proof of why you charged VAT on certain forms, especially for those that are ambiguous (such as occupational health forms, where the vatable status depends on the nature of the form) and the back-up paperwork (ie, the reports) will need to be provided.

If you scan all your reports into your patient record this shouldn’t be too much of a problem, as you can just print out a copy. However, those practices that just keep a photocopy for a while and then shred it will need to adjust their procedures to accommodate this new requirement.

Among all the other upheavals that practice managers have to deal with, this will be one of the more difficult for many of you. After all, for those of you already struggling to keep up-to-date with everything, this will be a more financially risky task to leave until the last minute. And with the insurance exemption about to be rewritten, registering for VAT may become the norm for most practices in the country.

The good news is that, with preparation and determination, once everything is set up it should run pretty smoothly and not give you too much of a headache. We have just submitted our report for our first quarter and it went well. Fingers crossed for next quarter!

HM Revenue & Customs