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04 Jan 2023

Understanding 'Vat De Minimis'

Lease United Kingdom Limited Hall: 1 Stand: M43
Understanding 'Vat De Minimis'

Understanding the allocation of VAT incurred on purchased for ‘de minimis’ is of prime importance for small/medium optical practices.  Miscalculation can cost a practice both on reclaimable VAT on purchases for Exempt goods and also on non-attributable tax on goods and services!

Please note, not every accountant is familiar with ‘Vat de minimis’ and mistakes on our VAT could cost you valuable money!  Chris Weera – our Professions Sales Manager explains more…

Optical practices typically offer sight tests and spectacle dispensing services.

Many independents charge for standard sight tests and a range of options including OCT and Wide field testing.  As these are all healthcare costs there is no VAT chargeable on them. 

However for dispensing of spectacles, contact lenses and any items sold at ‘front of shop’ full VAT is charged.

As opticians charge VAT on some of their business, but not all of it, HMRC applies ‘VAT de minimis’. This allows practices to reclaim a maximum of £7,500 of VAT in any rolling 12 month period on items they buy for the testing side of the business, as well as a proportion of the VAT on partially allowable equipment, for example; Shop Fit, Computers and Air Conditioning, additionally the VAT on the rent and service payments for the commercial premises.

Typically the main income for opticians is the dispensing side.  All costs are related, so the VAT on the cost of frames lenses and contact lenses is fully allowable.  Included in this category is glazing equipment (as this is not sight testing related) and separately invoiced display equipment.

All site testing kit in the test room, including the combi unit is fully exempt, therefore the VAT falls within the ‘VAT de minimis’ limit.

Items split between the retail shop and the test room(s) such as a practice IT system, rent of the commercial premises or a shop fit for the whole practice are deemed partially allowable. 

Fully Allowable

Partially Allowable

Fully Exempt

Frames, Lenses, Contact Lenses, Glazing Equipment

Shop Fittings, Computers, Air-Conditioning, VAT on Shop Rent

Sight Test Equipment

 

 

 

How The VAT De Minimis Rule is Applied

Should make up at least twice the Exempt VAT

VAT Split approximately 60/40 between Exempt and Allowable

Fully Exempt VAT plus 60% of Partially Allowable.

VAT must be less than £7,500 per annum

 

 

 

 

Notes

  1. 60/40 basis may be adjusted by discussion with HMRC.
  2. If you exceed the £7,500 in any 12 month period, you lose the reclaim of all that VAT (not just the VAT above the £7,500).
  3. This is cross checked at the end of each VAT year and any adjustments made.

The following year’s VAT return can be based on the previous year’s results so if you were under vat de minimis last year you can be deemed to be under for the following year. Note that a year end calculation is still done and if this determines you went over £7,500 in that subsequent year you have to repay all of that VAT.

How does this impact on financing for Optical Practices?

Practice owners need to be careful when they are buying Fully Exempt and Partially Allowable equipment!

For example, if you are buying a retinal imaging system costing £50,000+VAT by using Hire Purchase, a bank loan or cash reserves the full VAT of £10,000 is reclaimable at the point of acquisition (typically the invoice date).  However as this is testing equipment, the whole VAT will be part of your ‘Vat de minimis’ pot. This kit on its own will break your £7,500 limit!

Even if you are buying lower value equipment e.g. an OCT costing £26,000 +VAT in January, replacing a field screener for £7,000 +VAT in April and then decide to install an IT system across the practice in October for £10,000+VAT.  Let’s assume you take a Hire Purchase agreement for the OCT to spread the cost having paid cash for the screener and IT.

The VAT is:1) £5,200 for the OCT

2) £1,400 for the Field screener

3) £2,000 for the IT

 

When applying ‘VAT de minimis’- both 1 and 2 need to be applied in the same 12 month period. (When using Hire Purchase, HMRC deems the VAT reclaimable at the point the HP agreement is activated.)

The IT is partially allowable so 60% applicable i.e. £1,200

All of this expenditure totals £7,800 on the VAT side and therefore breaks ‘VAT de minimis’!

Rather than use Hire Purchase, a bank loan or your cash reserves for the equipment and the IT, a Lease option enables you to spread the VAT reclaim more thinly. 

This is because with a Lease, the finance company buys the equipment on your behalf and rents it to you across an agreed term – with VAT applied to each monthly rental.  As an example, if you acquired the OCT on a 5 year Lease, the monthly rentals may come in at £520+VAT per month.  The VAT you reclaim is £104 per month or just £1,248 over a 12 month period. Opting for a lease on the field screener and the IT further spreads your VAT.

Spreading your VAT with a Lease keeps your ‘VAT de minimis’ situation flexible so, should a replacement piece of test equipment crop up, you do not push yourself over the threshold.

Lease UK offers competitive Leasing to Opticians, arranged quickly and efficiently. Our friendly team are here to fully explain your options and answer any questions, keeping you informed and in control.

Your Business, your Broker – Lease UK working for you!

 

 

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