VAT and partial exemption

A business must register for VAT if they have taxable supplies of more than £85,000 in any
rolling 12-month period.

VAT partial exemption exists when a business supplies both non-taxable (being VAT exempt) and taxable goods or services.

It’s likely that all dispensing medical practices would need to be registered for VAT, as NHS prescription income is taxable income, but as the income is vatable, they can recover the VAT in full on any associated costs in earning that income.

Most other income received by a medical practice is exempt from VAT, for example, NHS income (enhanced services, GMS contract and QOF income) as it’s covered by the medical VAT exemption (where the primary purpose is the maintenance, restoration and protection of an individual’s health).

A business that’s partially exempt, would need to pay all the VAT due on sales, but it couldn’t claim back all VAT on expenses. Only VAT which is wholly or partially attributable to the taxable element of the business can be claimed back from HMRC on the VAT return. 

The business needs to decide whether VAT incurred on expenses can be recovered in full, in part or not at all and detail as such on their bookkeeping software.

The percentage of the input tax which is partially recoverable would be based on the ratio of exempt income to the total income (for each VAT return).

The calculation needs to be done at the end of each VAT period (be it quarterly or monthly depending on the chosen VAT return recurrence) and put through with the submission of the VAT return.

Following that, there needs to be an ‘annual adjustment’, which is compulsory for all partially exempt businesses.

The practice will need to include the difference on the next available VAT return and pay/claim the amount to/from HMRC as normal.

So, you can see that the categorisation of VAT on income is important, as it determines the proportion of the VAT on those residual expenses which would be claimed each quarter/month.

Things to consider

1. It’s always a good idea to keep bookkeeping up to date. Even more so if VAT registered, so as not to delay reclaiming VAT on large bills, such as invoices from drug companies.

2. There may be some instances where a medical practice may need to register for VAT outside of being a dispensary, and we’d recommend you seek professional advice if you feel this might apply to you.

3. Do you have Making Tax Digital complaint software for submitting VAT returns? And does the accounting software prepare the partial exemption calculations in the background for you (IRIS GP Accounts), or will you have to extract data to prepare the computations because the software doesn’t deal with partially exempt businesses (QuickBooks, Xero for example)?

Need help?

If you’d like to discuss VAT for your practice in more detail, please feel free to get in touch with your usual Larking Gowen contact or look for contact details in the Our People section of the our website. Alternatively, call 0330 024 0888 or email enquiry@larking-gowen.co.uk.

Emily Griffiths