If you run an independent optical practice, you already know that VAT is more complicated for you than it is for most businesses. Every pair of glasses you sell involves a mixed supply, and splitting that correctly between the taxable and exempt elements determines how much you hand over to HMRC each quarter.
The problem is that most practice owners set up their apportionment method years ago and haven't looked at it since. If that sounds familiar, you could be overpaying without realising it.
When a registered optician dispenses spectacles, the transaction contains two elements. The frames and lenses are goods, standard-rated for VAT at 20%. The professional dispensing service performed by the registered optician is a medical service, which is VAT exempt.
Every sale needs splitting between these two elements. The method you use for that split directly affects your VAT bill.
The first is separately disclosed charging. The customer sees two separate prices on their receipt: one for the goods and one for the dispensing service. Because the prices are shown separately at the point of sale, there's no need for an apportionment calculation. HMRC confirmed in Revenue and Customs Brief 14/2020 that a till slip showing the split is sufficient.
The second is full cost apportionment. This calculates the cost of providing the dispensing service as a proportion of the total cost, and uses that ratio to split your sales. The calculation factors in optometrist time, directly supervised staff, frames, lenses, and overheads.
Both methods are acceptable, but they produce different results. The right one depends on your staffing structure, your costs, and how your practice operates.
Revenue and Customs Brief 14/2020 made two significant changes. Practices using separately disclosed charging can show the split on a till slip rather than needing separate invoices. And practices can adopt a full cost apportionment method without prior HMRC approval, provided the method gives a fair and reasonable result.
This made it much easier to review and change your approach. But many practices haven't taken the opportunity.
The most common reason is that the method was set up when the practice looked different. Staff have changed, costs have shifted, the balance between NHS and private work may have moved, and the original calculation no longer reflects reality.
Another issue is using a method that doesn't account for all the relevant costs. If the calculation understates the cost of the exempt dispensing element, the taxable proportion comes out higher than it should, and you pay more VAT.
There's also the partial exemption calculation itself. Because you make both taxable and exempt supplies, you need to work out how much of your input VAT you can reclaim. If that calculation is based on outdated ratios, you could be under-recovering as well.
If your method hasn't been reviewed in the last two to three years, it's worth getting someone to look at it. The review itself isn't complicated, but it does need someone who understands both the VAT rules specific to opticians and how your practice operates.
A VAT review is usually one of the first things I do with a new optical practice client. The savings aren't always dramatic, but over a few years they add up.
I've put together a short guide covering five common financial mistakes I see in independent opticians. You can download it from my opticians page.
There's no hard sell here, just a conversation about where you are now and whether I can help.
Let's talkOr call 07899 296 552 · leigh.cooke@virtufin.co.uk