VAT, partial exemption and the annual adjustment for GP practices

GP practices are no different to any other business, so VAT needs to be considered in the same way as any other business.

A regular business needs to consider the level of taxable supplies being made. However, GP practices are different to other businesses in that much of their income falls under the healthcare exemption (where the primary purpose of that service is the maintenance, restoration and protection of an individual’s health).

Other income received by a GP practice may be from a patient or third party asking for an opinion on an individual’s health, or fitness to undertake something. In this instance, as the service doesn’t directly impact the patient’s health, it would be vatable at the standard rate, and the VAT on all directly related costs could be claimed in full.

GP practices who dispense medication to patients will also have vatable supplies, as income earned from dispensing items is vatable, albeit at 0%. Again, this means those practices can recover VAT on any costs incurred on those supplies. Any VAT incurred on the exempt supplies is not recoverable.

They will also have been charged VAT on overheads that can’t be directly attributed to vatable or exempt supplies and, in these instances, a proportion of the VAT is recoverable. This introduces the concept of partial exemption.

As part of the bookkeeping process, it’s crucial every expense is correctly analysed for VAT purposes.  Very few software solutions are able to account automatically for partial exemption, so the correct VAT codes need to be set up manually.

Depending on whether you’re inputting an income or expense, there are different areas to consider.

When entering an income item, consider whether VAT should be charged or not ie, was this income earned with the purpose of health maintenance/restoration etc (exempt), from dispensing activities (zero rated), or to provide an opinion (standard rated)?

When entering a cost item and VAT has been charged, consider whether VAT can be recovered on that item; in full, partially, or not at all.

Every time a VAT return is prepared, which is normally monthly, the practice must calculate the percentage of vatable supplies made during each reporting period, and apply that percentage to the partially recoverable VAT. This partially recoverable VAT amount is then added to the fully recoverable VAT amount and deducted from the VAT owed to HMRC on vatable services.

Dispensing GP practices would normally get a refund from HMRC due to being able to recover VAT on dispensing activities in full, but not on VAT being charged on the income, as it’s zero rated. If you are a dispensing practice and finding you’re having to make payments to HMRC, this could be an indication that something isn’t correct within your information.

Each month, the practice calculates its partial VAT recovery percentage. This can fluctuate each month depending on activity, so there’s a requirement, under the partial exemption rules, for an annual calculation to be done, to average out the figures over a 12-month period. The calculation should always be done for the April to March financial year, which may not be the same as your practice’s accounting year, and reported on the April VAT return.

The same calculation that’s done monthly should be carried out but using annual figures instead.  This will give an average recoverable percentage for the year which can be applied to the total VAT incurred on those overheads.

The practice needs to calculate how much VAT is due back from/owed to HMRC for the entire year and compare this figure with how much has been refunded/paid during the year. The difference is called the annual adjustment and needs to be included on the next VAT return.

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.

Louise Dean