VAT implications for community pharmacies

Making sure that VAT returns are completed regularly and accurately is key for community pharmacies to optimise cashflow, maintain the financial health of the business and comply with tax regulations.

VAT registration for pharmacies

Pharmacies, like other retail businesses, must register for VAT if their taxable turnover in a rolling 12-month period exceeds £90,000. Whilst VAT registration isn’t compulsory if turnover doesn’t exceed this limit, you may choose to voluntarily register to recover some of the VAT you have paid on your purchases.

Complex VAT rules

HMRC’s VAT Notice 701/57 (Health professionals and pharmaceutical products) provides guidance on how to account for VAT on goods and services provided by pharmacists.

Unlike other businesses, pharmacies provide products and services that have a mix of VAT rates. For example, the Single Activity Fee received for dispensing medication is zero rated for VAT; Pharmacy Quality Scheme income is outside of the scope of VAT; and the sale of malaria tablets would be standard rated (20%) for VAT.

Services such as administration of a flu vaccination would fall under the definition of a medical service provide by a health professional where the primary purpose of the service is the protection, maintenance or restoration of health and is therefore exempt from VAT.

Partial exemption

Since pharmacies make both taxable and exempt supplies, they are partially exempt for VAT purposes.

The VAT incurred on any costs that can be directly related to income from vatable supplies may be claimed back by the business in full. However, any VAT incurred on costs relating to exempt supplies is not recoverable.

The pharmacy will 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.

For each month, a partial VAT recovery percentage should be calculated to determine how much of the VAT on overheads the business may reclaim, on top of the VAT reclaimed on their expenses related to vatable supplies.

Since this monthly percentage can fluctuate throughout the year, under the partial exemption rules, you need to perform an annual calculation to average out the figures for a 12-month period. This annual adjustment should be reported on the VAT return at the end of the tax year.

Accurate record-keeping

Pharmacies must maintain detailed records of all transactions, including sales, purchases and expenses, to substantiate their VAT returns. This includes keeping invoices, receipts and other relevant documents for at least six years. Use of cloud accounting software can help simplify this process.

Timely VAT returns

Pharmacies must file their VAT returns regularly, usually on a quarterly or monthly basis. Timely filing of VAT returns will avoid penalties and optimise cashflow.

Need help?

VAT for community pharmacies has unique complexities that can make the task of submitting regular and accurate VAT returns challenging for many pharmacy owners. However, it’s important to make sure that you’re getting it right to maximise income and cashflow.

At Larking Gowen, we’re happy to help you with your bookkeeping and VAT returns to help you manage your VAT obligations effectively and efficiently. Please get in touch on 0330 024 0888 or email enquiry@larking-gowen.co.uk.

Jo Benton