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Why VAT man has pot of gold in store for dispensing practices

Dispensing practices now have the opportunity to reclaim some earnings ­

Tim Buss

explains

any predictions for 2003 were gloomy, but there was good news for dispensing practices from one unlikely source ­ the VAT man. This was thanks to a ruling by the Court of Appeal concerning an issue that has been progressing through the legal system for the past seven years.

The issue was whether or not drugs dispensed by a doctor were supplies of goods. It is the view of the VAT authorities and H M Customs and Excise that dispensing drugs is a medical service and therefore exempt from VAT. As a result, Customs has traditionally refused to allow dispensing practices to recover VAT on the cost of the dispensed drugs. They say when drugs are sold separately, as opposed to being dispensed, there is a supply of goods which, when supplied under NHS regulations, is zero rated.

The counter argument to this is that when drugs are dispensed there are in fact two supplies. One is medical services of dispensing, which is exempt from VAT. The other is separate supply of drugs, and this is zero rated. And the crucial difference between exemption and zero rating is that zero rating allows a supplier to recover VAT on related costs.

The Court of Appeal ruled that there are indeed two separate supplies. The consequence of the ruling is that, as dispensing practices are making zero-rated supplies, VAT on the cost of the dispensed drugs can be recovered. The ruling also entitles dispensing practices to recover VAT on a proportion of general overhead costs.

The exact proportion will depend on a number of factors. There are various ways of calculating the recoverable proportion. The simplest way is to establish the ratio of income from drugs dispensed to the total practice income, and apply the ratio to VAT incurred on general overheads.

Dispensing practices, which are already VAT registered, should lodge claims for repayment of VAT incurred on the purchase of drugs for the last three years. Unfortunately the VAT legislation does not allow claims to be made for periods in excess of three years.

Claimants will need to ensure that a claim can be evidenced by having the appropriate invoices available for inspection by Customs if required. The claim should not be made on a VAT return, but should be made by letter with an appropriate schedule.

Customs will require the claim to be made on a period by period basis, the period coinciding with VAT return periods.

Dispensing practices that are not registered for VAT should consider the benefits of becoming VAT registered.

It is possible to register retrospectively, but it is not possible to backdate

the registration any earlier than three years before the date of the application.

To sum up, dispensing practices are advised to calculate VAT on the cost of drugs dispensed for the last three years and either submit a claim to Customs if registered for VAT or apply for a retrospective VAT registration.

A claim for a proportion of VAT on general overhead costs should be included, especially if there has been significant capital expenditure within the last three years.

Court of Appeal has ruled that VAT on the cost of dispensed drugs can be recovered~

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