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Practices learn the basic rules of VAT

VAT-registered practices need to start recording transactions correctly. By Faye Armstrong

Practices needing to be registered for value added tax (VAT) since the abolition of VAT-exempt status on many non-NHS private and professional services from 1 May have a number of issues to deal with.

Not only do they face extra bookkeeping and a possible loss of income if patients go elsewhere rather than pay an extra 17.5 per cent in VAT. The VAT system and its jargon are not easy to understand. Knowing what the term 'supply' means is key to mastering VAT basics.

GP practices make various supplies - in other words they provide various services. If the practice is VAT registered, some supplies are subject to VAT. The categories are standard-rated supplies where VAT is charged at 17.5 per cent; zero-rated supplies where VAT is zero per cent and exempt supplies.

All GMS, PMS, specialist PMS and alternative provider medical services are exempt supplies.

The VAT registration threshold is £64,000 a year for 2007/8.

Since that figure only relates to supplies taxable for VAT purposes, GPs need to know which private and professional services are exempt.

So what should happen when a VAT-registered practice provides a service to which VAT applies?

Suppose a GP performs a large goods vehicle (LGV) driver medical and charges £200 for the service. The GP correctly decides this supply is standard-rated and charges the LGV driver VAT at 17.5 per cent, bringing the total cost to £235.

By charging this VAT, the GP is acting as tax collector for the government and will hand over the £35 when the practice's next VAT return is submitted.

PREPARING VAT RETURNS
  • A VAT return is a summary of all VAT transactions during a VAT-accounting period.
  • Most businesses prepare VAT returns quarterly, although some GP practices opt for monthly returns.
  • Either way, the completed return must be submitted to HM Revenue and Customs (HMRC) within a month of the end of the VAT-accounting period.
  • While preparing the return, the practice needs to do a 'partial exemption' calculation. This involves working out taxable supplies (services) for VAT purposes as a percentage of total supplies. This percentage is the amount of VAT the practice can reclaim on its expenditure.

VAT invoice
If the LGV driver is also VAT registered, the GP must issue a VAT invoice and keep a copy for practice records. The practice must also record the pre-VAT fee, the VAT charged and enough details to locate the sales invoice if asked to produce it by HM Customs and Revenue (HMRC). VAT records can be anything from a handwritten cashbook, to a print-out from a specialist computerised bookkeeping package.

If a GP provides a standard-rated (or zero-rated) supply, VAT can be reclaimed on the costs of providing that service. However, with exempt supplies, the practice is not entitled to reclaim.

As part of the LGV driver medical, the GP asks a laboratory to test a sample of the driver's blood.

The laboratory sends the practice an invoice for £100 plus VAT. As the original work the medical was standard-rated, that same rating applies to all the associated costs. The practice is therefore entitled to reclaim the VAT of £17.50 on the blood sample invoice.

The situation is not as straightforward with this practice's electricity bill which includes VAT of £40.

Electricity is a business overhead cost and the practice uses it to make (provide) both standard-rated and exempt supplies (services). The practice can reclaim only a proportion of the VAT. The reclaimable proportion is the total of standard-rated and zero-rated supplies as the percentage of total practice income from all supplies (services). The practice works out it is entitled to reclaim 20 per cent (£8) of the VAT because 20 per cent of total income is from these non-exempt supplies.

The blood test and electricity invoices must be recorded in the VAT records, together with the pre-VAT amounts, the VAT charged and sufficient details to locate them. When the VAT return is prepared, it should be possible to readily see how much VAT was charged on purchases used to make standard-rated or zero-rated supplies and on exempt supplies.

- Faye Armstrong is technical VAT manager at specialist medical accountants Dodd & Co in Penrith (www.doddaccountants.co.uk)

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