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VAT saving opportunity in the optical sector

VAT saving opportunity in the optical sector

Wednesday, 07 October 2020

A recent HM Revenue & Customs (HMRC) update on the VAT treatment of prescription eyewear means it’s now easier than ever for optical practices to review their VAT position to make sure the correct amount of VAT is being accounted for on optical sales.

When an optical practice dispenses a pair of spectacles or contact lenses, it’s accepted by HMRC that the optical practice has made a mixed supply for VAT purposes. The optical goods are subject to VAT at 20%, whereas the dispensing service is exempt from VAT when performed by an optometrist or a dispensing optician.

Subject to an optical practice’s VAT profile, the higher the proportion that can be reasonably attributed to exempt supplies, the higher the net profit margin will be on the sale.

HMRC have agreed a method with the optical sector to calculate the VAT split. However, the calculations are complicated and often produce results which apportion more income to the taxable element than necessary.

Separately disclosed charges (SDCs)

Our VAT specialists are experienced in agreeing separately disclosed charging methods with HMRC on behalf of optical clients, so you don’t have to carry out the complex apportionment calculations. In the majority of cases, using this method allows an optical practice to attribute a higher percentage of income to the exempt services, thus saving VAT.

HMRC recently issued a Brief which further simplifies the requirements to operate the system. So, it has never been a better time for you to explore whether your optical practice may benefit.

However, an optical practice must fulfil specific administrative criteria and, most importantly, be able to demonstrate that the value of the sale allocated to the goods element does not result in a situation where the products are effectively being sold at a loss. We have designed a system to safeguard against this risk, which has been approved by HMRC.

VAT calculations

Some optical practices have found that SDCs and apportionments produce different outcomes on different supplies. It may be possible for an optical practice to use SDCs for sales of spectacles and an apportionment method for contact lenses, for example. As a result of HMRC’s latest update, you don’t need to agree the position with HMRC in advance, which makes the process an even more attractive option.

However, there is potentially a sting in the tail; any apportionment calculation should be carried out with care and must produce a fair and reasonable result. If professional advice isn’t obtained it may leave an optical practice operating a bespoke method at risk of scrutiny from HMRC in the future.

If you would like to book a free initial consultation with one of our VAT experts, with no obligation, please get in touch. You can find contact details on the Our People section of the Larking Gowen website. Alternatively, call 0330 024 0888 or email enquiry@larking-gowen.co.uk.

Daniel May

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