VAT methods for Opticians - AEL opinion published in Optician in March 2003

Comments on OPTICIAN article by Marc Bennett (re: pp14-15 26 Sept 2003)
Understanding VAT

Dear Sirs,

OPTICIANS VAT MATTERS !

I agree and applaud the author’s sentiment in bringing OPTICIANS VAT matters to the attention of your readers.

However, I am concerned that readers could misinterpret some of the important issues covered in his article. This in turn could lead to them potentially losing out by settling for a less advantageous VAT position with Customs.

AEL were one of the first VAT Consultancy firms to file repayment claims for independent opticians in the mid 1990’s in anticipation of the Leightons /Eye Tech High Court rulings. (Those verdicts simply confirmed the earlier 1988 European Court of Justice decision in EC Commission v UK case ).

The opinions given below come from our extensive experience over the past 10 years of negotiating with Customs the largest number of VAT agreements for independent Opticians.

Our specific comments on the above Article are :-

1. The worked example follows the same layout as Customs 1999 Business Brief and may no longer be acceptable to Customs (in particular, the way the "cost of staff dispensing" has been calculated).

Currently, Customs insist that any method used to attribute dispensing costs should be agreed with them prior to implementation. Customs current policy is that a system based on time rather than income is more appropriate for calculating the proportion of direct costs attributable to dispensing. This view has recently been supported by VAT Tribunal, which found that an income- based system exaggerates the proportion of costs (particularly the O O's) attributed to dispensing. In the example referred to in the article, 80% of O O’s costs were attributed to dispensing.

2.The author seems to infer that there are only two methods of apportionment acceptable to Customs; those being Full Cost Apportionment and Separately Disclosed Charges.
However, VAT legislation states that any method can be applied, as long as Customs accept that the method allows a proper attribution of values (s19(4) VATA 1994).
It is therefore possible to agree apportionment rates with Customs based on a variety of methods (e.g. Customs have agreed apportionments linked to a revised cost-plus system).

3. We are concerned that readers who review the worked example will consider the resulting apportionment of 48% exemption as a recommended guide to the likely exemption they should expect. It should be noted that many independent opticians have agreed Vat exemptions on spectacle sales in the range of 55% - 65%.

4. The article makes reference to VAT apportionment only on spectacle dispensing, although these methods are equally valid and appropriate for the dispensing of contact lenses and prescription sunglasses.

In summary, Independent Opticians should seek to ensure that they gain maximum advantage from the exemptions used in preparing their VAT returns, as this can have a marked effect on their bottom line profits.

Specialist assistance is highly recommended to ensure that the methods used are both acceptable to Customs and based upon the individual merits of each Practice.

Marc Bennett FCA