Specific applications: Opticians and sellers of hearing-aids: basis of apportionment
If a single charge is made for supplies of spectacles and lenses and/or contact lens, and the dispensing service, opticians should be apportioning this in accordance with a method that has been agreed with the Department through the VAT Written Enquiries Team. The guidance below provides an example of a full cost apportionment method but opticians are free to propose alternatives provided that they can demonstrate that these are logically based, can be supported by calculation and achieve a fair result. Further guidance can be found in section 32 of VAT Notice 700: The VAT Guide.
It should be noted that the example of a full cost apportionment method described in Information Sheet 08/99 is not a default option to be applied in the absence of agreement to use an alternative. The method used in the Information Sheet for identifying the cost of an opthalmic optician, i.e. by reference to eye test income, is unlikely to provide a fair and reasonable result unless the opthalmic optician spends more time dispensing than performing eye tests.
All reference to spectacles in this guidance, also refers to contact lens and related services.
It is likely that some form of costs-based method will be most suitable. The method selected is likely to be determined to a large extent by the extent to which direct attribution of the costs is possible. This in turn will be influenced by how each trader’s business is arranged. If a trader can directly attribute his costs to both supplies, method 1(a) in section 32.2 of Notice 700 may be the most suitable method. Since 1 January 1998 apportionment methods for opticians deriving from the direct attribution of costs to only one supply have not been approved by HMRC.
Some of the costs normally attributable to spectacles and contact lens when these are bought in are:
- the cost of purchasing the spectacles (or frames/lenses if bought in separately)
- the cost of delivery of the spectacles to the sales premises
- the cost of insuring the spectacles
- storage costs.
Where the spectacles are made by the trader’s own business, the main cost attributable to them will be the cost of manufacture. This includes the following cost elements:
- cost of materials, labour, storage, manufacturing equipment
- delivery charges to/from the point of manufacture
- equipment maintenance costs
The following costs will normally be attributable to the exempt services:
- optician’s remuneration
- costs of the eye test (if this is included in the single charge).
Remember the above lists are not exhaustive.
General overheads should be omitted from the calculations or split in the same ratio as the directly attributable costs, unless it is possible to attribute them to the different supplies upon a supportable basis. For example, a business may at one location manufacture spectacles, conduct eye examinations and have an area where a range of spectacles is displayed for customers. If these three areas are clearly separate and each has a sole or main function the comparative floor areas may be suitable for apportioning the overheads between the two supplies. The proportion of overheads attributable to the display and manufacturing areas would be included in the costs of the spectacles. The overheads of the examination area would be included in the service costs.
You should bear the following points in mind when considering any apportionment:
- No standard “percentage split” between standard-rated and exempt supplies has been, or will be, agreed between Customs and opticians’ trade bodies. Because there are so many variations between the individual circumstances of these traders it is not possible to agree standard VAT values that would produce a fair result in the majority of cases.
- Leightons and Eye-Tech did not establish any agreed values for an apportionment. Traders may present an apportionment of say, 60% standard-rated and 40% exempt, claiming that these decisions established such a ratio.
Such claims are to be rejected upon two grounds:
- Neither Leightons nor Eye-Tech involved consideration of an actual apportionment - the issue was whether there was a single supply or two supplies that would entail an apportionment.
- Even if one of the cases had resulted in a decision as to the taxable and exempt proportions, this would only relate to the particular trader in the particular case. The same method of apportionment can give rise to widely varying ratios for different traders. This is explained fully in page VATVAL03700 of this guidance.
Traders may purport to only be making a profit on the exempt services. Such a claim is to be rejected; we will not accept an argument that the spectacles are only being sold on at cost while all the profits are arising upon the exempt services. For details please see VATVAL04100.
Detailed guidance on the apportionment of charges for spectacles and dispensing was provided in Information Sheet 8/99 which has been reproduced in full on page VATVAL 12420.