VAT registration is now unavoidable for some practices, although speculation that up to 75 per cent of GPs will be affected by the change to the tax rules is unfounded, according to medical accountants.
The good news is that despite the extra work VAT accounting will entail, registration might prove a winner if the practice can reclaim a significant amount of VAT paid on purchases.
Immediately affected are dispensing practices in England and Wales. They should register for VAT with Revenue and Customs (HMRC) by 1 April, which is when the Prescription Pricing Authority will stop reimbursing VAT on dispensed items.
From that date, dispensing GPs can only reclaim the VAT they have paid on dispensed drugs. But because VAT paid on personally administered drugs cannot be reclaimed by registered practices, the DoH has agreed to pay a VAT allowance on these items.
This change does not affect dispensing practices in Scotland or North Ireland.
However, throughout the UK any practice earning over £60,000 per year from non-NHS income such as insurance reports and expert witness work could be required to register.
A date has yet to be set but this could also come into effect on 1 April 2006.
'Revenue and Customs might decide not to introduce it at the same time as changes for dispensing practices,' says John Barnes, VAT director with accountants Baker Tilly in Leeds, predicting that a minority of practices will be affected.
This second need to register arises from a European Court of Justice ruling that VAT must be charged on medical services that do not 'protect, maintain and restore' health.
HMRC is currently deciding the date it will apply from and which services - likely to include insurance reports, expert witness work and pre-employment medicals - will be 'VATable'.
Valerie Martin, national medical director for accountants PKF, believes very few practices have enough income from these sources. 'The vast majority will be unaffected,' she says.
Andrew Spear, of Somerset accountants Lentells, agrees: 'I have a 10-partner practice with around 17,000 patients, and even their income is only just over £60,000 for this kind of work.'
Claims that 75 per cent of practices will have to register are 'rubbish' in his view. Practices registering for VAT will face extra work, though this should level off in time.
VAT accounting software will ease the strain and GPs' accountants can provide the expertise to train staff and set up systems, but they will charge for doing extra work.
Shropshire GP Dr Christopher Lisk, a partner at a non-dispensing practice, does expert witness work and expects to have to register for VAT. However he does not expect it to cause him undue problems.
'The imposition of VAT holds no fear for me,' he says. 'I will employ an expert to deal with the VAT side of my accounts and simply cost this into my work.'
Partnerships over the £60,000 threshold are unlikely to be able to avoid registration by divvying up pooled non-NHS income between the partners, instead of putting it through the practice accounts, warns Paul Kendall of accountants Dodd & Co in Cumbria.
'The disaggregation rules are there to stop people making an artificial split just to get under the VAT limit,' he says.
The VAT 1 registration form can be filed online or posted. HMRC says a VAT number will be issued within three weeks or so and it is setting up a special team to handle dispensing practices' applications.
Practices should start keeping VAT records from the registration date when they must also start charging VAT on all taxable goods and services.
For example, if selling a computer, add VAT to the price.
Dispensing practices must charge VAT on drugs dispensed on private prescriptions, or sold over the counter.
Zero-rating (no VAT) will only apply to drugs dispensed on NHS prescriptions, but all vaccination and medical examination charges stay VAT-exempt. VAT on any items fully attributable to dispensing can be fully reclaimed.
VAT on vaccines and personally administered drugs that are purchased by the practice will be reimbursed via the Prescription Pricing Authority.
VAT on these items is treated as 'exempt input tax' because it is attributable to exempt medical services that are provided by doctors.
Similarly, equipment bought for consulting and minor surgery rooms is attributable to GPs' exempt services, making it non-deductible for VAT.
However, VAT on overhead costs can be partially reclaimed in line with the percentage of total income dispensing, or when applicable non-NHS, income represents.
Practices must categorise VAT on their purchases as fully attributable to dispensing, or non-NHS work (fully recoverable); fully attributable to exempt medical services (not recoverable); or general overhead cost (partially recoverable).
VAT returns are the forms used to notify HMRC of how much VAT the practices owes and how much it can reclaim. Returns are completed every three months but accountants advise dispensing practices to send in returns monthly to avoid cash flow problems.
Contrary to rumours, VAT-registered practices are unlikely to need cash tills according to Mr Kendall. 'If a practice can show how its income comes in, they won't be forced to have a cash till,' he says.
VAT registration will give qualifying practices the opportunity to claim back VAT on some of their overheads, relative to the proportion of dispensing income to the entire practice income.
This could prove to be profitable, says Ms Martin: 'It will be a nice bonus for dispensing practices who have to register for VAT.'
The same applies to non-dispensing practices registering although for them there is likely to be far less in relevant overhead costs to reclaim.
- All dispensing practices will need to register for VAT: talk to your accountant now.
- Non-dispensing practices with earnings over £60,000 per year from work not principally designed to 'protect, restore or maintain health' may also have to register for VAT in future.
- Registration takes a few weeks and is relatively straightforward.
- A step-by-step guidance note for dispensing GPs is due to be posted on HMRC's website.
- For a general guide to VAT registration, CD-ROM 'Getting started in VAT' is available by calling HMRC's national advice service, 0845 010 9000.
- Filling in VAT returns is an administrative function that will become routine. Accounting packages will help achieve this.
- Dispensing practices need to do monthly rather than quarterly VAT returns to avoid huge cash flow problems.
- A full drugs stock take may be necessary for dispensing practices.
- There are potential gains to be made from reclaiming VAT paid on a proportion of practice overheads.
- The Dispensing Doctors' Association offers advice to members at www.dispensingdoctor.org.