Questioning OPTICIANS VAT methods - what rights do Customs have ?

There is currently a great deal of concern over whether Customs & Excise have a right to question VAT apportionment methods that have already been agreed with Opticians (News - Optician 16/4/04).

The question of whether an OPTICIANS VAT agreement represents a contract or simply an informal arrangement will most probably be determined through the courts. However, what is not in dispute, is that Customs are spending a great deal of time and effort in setting up special teams with the brief of reviewing existing OPTICIANS VAT agreements. Customs goal is to renegotiate exemptions on sales at 60% taxable and only 40% exempt, thereby eliminating the current trend of making quarterly VAT repayments to Opticians.

If subsequent investigation disproves the basis for the original agreement, then Customs are able to successfully challenge the previously agreed exemptions. Specific areas of challenge include where the original assumptions are commercially unrealistic or where there has been a change to the ownership or structure of a Practice.

So what can practitioners do about this ? Surely an attack on existing output tax exemptions will lead to a further erosion of profits for independent practitioners ?

The answer, surprisingly, is that this is not necessarily the case. AEL have now successfully negotiated over 100 agreements for Independent Opticians on VAT matters. We have found that where an original agreement was prepared using sound commercial assumptions with the backup of complete and accurate accounting records, then there will usually be little scope for Customs to materially challenge the exemptions. It will certainly help the practitioner if they have professional representation to deal directly with any queries raised by Customs. Furthermore, if there is concern that the assumptions in the original agreement were based on shaky foundations, then a new agreement should be prepared before Customs have an opportunity to raise a challenge.

More importantly, we have found that there are many practices losing thousands of pounds by having their exemptions set too high ! Although this reads like a contradiction, it is not. In many circumstances, it would benefit the practitioners to spend less time concentrating on the “headline” output (sales) tax exemption and spend more time looking at the input tax recovery on expenses. Certainly, we have found that where practices disassociate the recovery of input tax with the way that output tax is calculated, then the financial benefits to practices can be very great indeed.