An introduction to VAT for GP practices

UK businesses are required to charge value added tax (VAT) on certain goods and services. They must register for VAT if their VAT-able turnover exceeds the current threshold of £85,000 a year.

The VAT collected is paid to HMRC and businesses can recover some or all of the VAT they have incurred on their costs.

VAT is charged at the rate of 20% on standard-rated goods and services. There is also a zero-rating where no VAT is charged but the business can still reclaim the VAT it has incurred. Zero-rate relief is a concession granted to the UK on certain goods and services on accession to the EU (for example, on certain prescribed drugs).

Some goods and services are exempt from VAT, because they are subject to other tax regimes (such as on insurance) or because they are for the social good (such as medical care and welfare services), or they fall outside the scope of the UK VAT system.

How does VAT apply to general practice?

The supply of health services provided by registered health professionals including doctors are generally exempt from VAT. Therefore, non-dispensing practices are usually not registered for VAT. These practices will still receive some VAT-able income, such as from character references and private fitness and travel reports (where no medical care is provided), but the income from these sources is usually below the VAT registration threshold. This also means most non-dispensing practices are unable to claim back the VAT incurred on their costs.

Dispensing practices are usually VAT registered, as their VAT-taxable turnover will be more than £85,000 a year. Because over-the-counter dispensing is a zero-rated transaction, the dispensing practice does not charge the patient VAT, but it can reclaim the VAT incurred on drug purchases and some VAT on overheads.

They cannot, however, reclaim VAT on costs in relation to providing VAT-exempt healthcare services. This means that if the practice pays VAT on staff supplied, for example, locums, the VAT charged is an extra 20% cost to the practice.

They also have to charge VAT on other VAT-taxable services provided, such as medical reports.

An increasing number of non-dispensing practices are being pulled into VAT registration as they merge or join super practices because the combined income from VAT-taxable sources exceeds the VAT registration limit, or they join up with dispensing practices.

Lizzy Lloyd and Rob Skilton are accountants at MHA Larking Gowen, a member of the Association of Independent Specialist Medical Accountants