Some practices will need to register for value added tax (VAT) from 1 May 2007 when the current VAT exemption will be removed from certain medical services. While this is an additional ‘red tape’ burden, practices likely to be affected that get organised now should be able to absorb the extra accounting work involved fairly readily.
Which services are affected?
Medical services intended principally to protect, maintain and restore the health of an individual will still be exempt from VAT. These include services provided under a GMS, PMS, specialist PMS or alternative provider medical services (APMS) contracts.
Medical services that are primarily for the purpose of enabling a third party to take a decision such as pre-employment medicals, which are currently exempt, are subject to VAT from 1 May.
Must the practice register?
This change is likely to only effect the larger practices because you will need to register for VAT if the taxable income (including VAT) will exceed the VAT threshold currently £61,000.
In other words, your income from those medical services that will become subject to VAT must exceed the threshold — see the box for examples. Note that after GP went to press, Chancellor Gordon Brown may have proposed increasing the VAT threshold for 2007/8 in the Budget on 21 March.
How do we register?
If you do need to register for VAT, you will need to complete a VAT 1 form, and if you are a partnership, you will also need to complete VAT 2. You can download these forms and/or register online at www.hmrc.gov.uk.
When are VAT returns due?
Once the practice is registered for VAT, HM Revenue and Customs (HMRC) will issue quarterly VAT returns, which need to be completed and submitted to HMRC one month following the quarter end. If you need to apply for VAT from 1 May 2007, your first VAT return will be for the quarter ended 31 July 2007, which you should send HMRC by 31 August 2007.
However, if the practice’s taxable supplies for VAT purposes (see box) are below £1.35 million, you can apply to join the annual accounting scheme. This allows you to complete just one VAT return every 12 months from the date your registration applies.
You pay instalments of the VAT that you expect to owe and when you complete the VAT return for the year, you pay any balance owed. The deadline for submitting this annual return is two months after your VAT year end.
How do we charge VAT?
The standard rate of VAT is 17.5 per cent. To ensure the amount the practice earns from a non-exempt service does not fall, add this to the amount you charge. For example, if you charge £8 to countersign a passport application, the 17.5 per cent VAT is £1.40. The new total charge becomes £9.40 (£8 + £1.40).
When recording this income in the practice accounting system, show the total amount as £9.40. Under a column for VAT, include £1.40 and log the net amount of £8 under private fees.
Because patients will be paying more for private services attracting VAT, warning them in advance in the practice leaflet or newsletter, on the practice website and via a prominent notice in the surgery waiting area is advisable. Include a list of the services for which VAT will be added. Invoices you send out must show the practice’s VAT number.
To reclaim VAT on purchases, you must have a VAT invoice made out to the practice or partners. Because GPs provide 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.
The partial exemption method calculates the taxable supplies for VAT as a percentage of your total supplies (see box below left). Practices should be eligible for the cash accounting scheme if their taxable supplies for VAT will be £660,000 or less. You can then reclaim VAT when you pay an invoice.