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HMRC internal manual

VAT Valuation Manual

HM Revenue & Customs
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Specific applications: Opticians: Apportionment of charges for supplies of spectacles and dispensing: a suggested full costs apportionment method

An apportionment is required when an optician makes a single charge for supplies of spectacles and dispensing. No account should be taken of other supplies that are made in return for their own separate charges, such as sight tests. The apportionment is required by virtue of section 19(4) of the VAT Act 1994, which demands a “proper attribution” of value between any supplies that are made in return for a single charge. Nothing in the Act requires any particular method of apportionment to be used.

The full costs method set out below is a suggested method which may require variation according to the circumstances of the optician’s individual practice. If an optician proposes using this method it will not therefore automatically receive approval from HMRC.

New businesses

When a new optician’s practice opens, it is not possible to immediately perform an accurate apportionment of the charges made for spectacles and dispensing, particularly if the apportionment method adopted is based upon costs. New practices should therefore agree a provisional basis of apportionment with HMRC. At the end of the first year’s trading it will be possible to revise the apportionment method in light of the costs actually incurred.

Cost of Goods

In order to perform the apportionment, an optician must establish the cost of the goods. This entails the following information: -

  • The number of spectacles dispensed in the period;
  • The cost of purchase of bought-in frames;
  • The cost of purchase of bought-in lenses. Some practices, rather than buying in lenses cut to an individual patient’s prescription, will purchase blank lenses and glaze them “in-house”. In this case it will be necessary to establish the cost of the glazing function and also any directly attributable expenses incurred on consumables. Indirect costs, such as depreciation on fixed equipment, should not be included; and
  • It may also be necessary to include the cost of delivery if the optician has goods delivered from a central point of distribution to a chain of outlets. However, an allowance may have to be given where the delivery charge relates to other goods included in the delivery (that is, contact lens fluids, cases, chains, etc.).

Note: Opticians may include spectacle cases or other items within the overall cost of the sale of a pair of spectacles. The cost of the case or spectacle chains, etc. should not be included in the apportionment calculation. See paragraph 5 below about whether costs should include VAT.

Cost of services

In order to perform the apportionment, the optician will need to establish the cost of the services.

There may, in any optician’s practice, be both an Ophthalmic Optician (OO) and a Dispensing Optician (DO). An OO is allowed to carry out sight tests and also dispense spectacles, whereas a DO is only allowed to dispense spectacles.

The direct labour costs of both OOs and DOs, together with the direct labour costs of an unqualified person who works under the direct supervision of an optician registered under the Opticians Act 1989 or within an establishment registered as a “corporate body” under section 9 of the same Act, will need to be established. Conventional accounting procedures should be used to determine the costs incurred in making the exempt dispensing supplies. Subparagraph (d) below gives more information on what is meant by “direct costs”.

  1. Ophthalmic Opticians

Eye tests have always been exempt and opticians need to determine what proportion of the cost of an OO is attributable to the exempt eye test and what proportion is to be attributed to the exempt dispensing service element of spectacle sales. In some practices, the OO may also be performing various administrative, managerial or other “non-medical” activities associated with running the business. If the actual costs attributable to each activity are not identifiable, the total costs will need to be apportioned to the various activities. Only that proportion of the OO’s costs which is attributable to the dispensing service element of the spectacle sales is to be included in the main apportionment calculation.

Paragraph 6(ii) below contains one possible formula (others will be considered by HMRC, if they can be shown to achieve a fair and reasonable apportionment) for calculating the OO’s costs that can be attributed to the dispensing services. In this formula, the proportion of the income generated from the spectacle sales is used as a multiplier to establish how much of the OO’s total costs can be attributed as costs of their dispensing services.

Customs are generally prepared to accept that an element of an OO’s time is spent on dispensing activity, but the optician must be able to demonstrate the actual level of dispensing activity and agree it with HMRC. The formula at paragraph 6(ii) may not be appropriate for all opticians and alternatives may be agreed with HMRC. Customs consider that the level of dispensing activity will often be reflected by the amount of time an OO is engaged upon this activity. For example, if an OO spends half their time providing sight tests and the other half dispensing, it would be more appropriate to simply use half their costs for the purposes of the apportionment calculation instead of the income-based formula at paragraph 6(ii). When an optician considers that factors other than time should provide the basis for apportioning the OO’s costs, it is for the optician to identify those factors and submit an appropriate apportionment method for Customs’ approval.

Note: Where an OO’s time is involved solely in the exempt supply of eye tests, all of their costs can be attributed to the exempt eye test and should not feature in this apportionment method at all. In other words, 6(ii) will be omitted from the calculation and only the direct costs of DOs and supervised non-registered persons will be included at 6(iii) below.

  1. Dispensing Opticians

Opticians will need to calculate the direct labour costs to the practice of the time that DOs spend in the dispensing of spectacles.

  1. Directly Supervised Persons

A proportion of the direct labour costs of those unqualified employees providing a dispensing service, and who either work as part of a qualifying body corporate, or who are directly supervised by a registered optician (See Note 2 to Group 7 Schedule 9 VAT Act 1994) may also be included in this part of the equation. The actual percentage of these costs relating to dispensing duties will need to be agreed by the optician and HMRC and may vary from practice to practice. The factors which decide whether a situation qualifies as “direct supervision” are set out in Annex B of “Guidance for the trade: VAT health exemptions and direct supervision.”

  1. Direct Costs

In calculating the direct costs of OOs, DOs and directly-supervised persons the following principal costs will need to be included: (This is not an exhaustive list).

  • Salary
  • Employers’ National Insurance Contributions
  • Pension contributions by employer
  • Cost of provision of vehicle to OOs and DOs involved in dispensing of spectacles
  • Optical training of opticians and supervised persons
  • Professional body subscriptions incurred by the practice (only in respect of services received, not goods)
  • Professional indemnity costs incurred by the practice
  • Recruitment costs.

Calculation of percentage of income from spectacle sales attributable to taxable supplies

Once the above costs of goods and services have been calculated, it is necessary to establish the average cost of each supply. This is achieved by dividing the costs of the goods and services by the number of spectacles (new and reglazed) dispensed in the period.

The taxable element of the sale is then calculated using the following formula:

(Cost of goods [frames and lenses] / Cost of goods and cost of services)  x  (spectacles income x 1/6)  =  VAT due on sales

The apportionment method here is essentially that set out in a more basic form as Method 1(a)(i) in Appendix E to Notice 700: “The VAT Guide”. Method 1(a)(i) has been available to businesses for a considerable time. It contains a specific step in the calculation whereby an amount equivalent to the standard VAT rate is added to the costs of the standard-rated supplies. Opticians must adopt the same procedure from 1 April 1999. Therefore, the cost of goods in the above formula will be the total costs exclusive of any VAT that was charged to the optician and recovered as their input VAT plus 20%. For the avoidance of any doubt, any VAT charged to the optician in the costs of making the exempt services should be included as part of the costs of that service.

Once the percentage applicable to taxable sales has been established, this percentage should be used as the basis of the optician’s VAT return. The percentage should be recalculated at three-yearly intervals or whenever a major change in the optician’s business takes place. Customs consider a “major change” to be anything which significantly alters the costs of the supplies. Many circumstances could produce such an effect. They include the following list, which is not exhaustive:

  • Opening an additional branch of the practice
  • Closing an existing branch of the practice
  • Employing additional OOs, DOs and directly-supervised persons
  • Reducing the numbers of OOs, DOs and directly-supervised persons
  • Restructuring the practice, for example, if a practice in which an OO has previously performed both sight tests and dispensing services restructures so that the OO exclusively performs sight tests
  • Changing from buying in lenses to glazing “in-house” (or vice versa)

If an optician is uncertain whether particular circumstances constitute a major change, they should contact HMRC for further guidance. Alternatively, it may be more practicable to recalculate the taxable percentage at the end of each year and perform an annual adjustment.

Worked example

A worked example of a full costs apportionment calculation is set out below.

(i) Cost of goods (see paragraph 3)

(Total cost of frames and lenses / Number of spectacles dispensed [new and reglazed] in period)  = A

(ii) Cost of OO relating to spectacle sales (see paragraph 4(a))

(Spectacle sales income   X  Direct cost of OO) / Spectacle or contact lens sales income and sight test fees  =  B

Note: Another calculation may be more appropriate for calculating the proportion of the OO’s costs that can be attributed to the dispensing. The above calculation, or any alternative, is to be agreed between the optician and the local VAT Business Advice Centre.

(iii) Cost of service per unit (see paragraphs 4(b) and (c))

(B + Direct cost of DO + Non registered person)  /  Number of spectacles [new and reglazed] dispensed in period  =  C

(iv) Calculation of percentage of income from spectacle sales attributable to taxable supplies

(A / A+C) X 100  = D (to two decimal places)

Therefore, if D produces a figure of 30%, this means that 30% of the income from spectacle sales is attributable to taxable supplies. For example, if a pair of spectacles is sold for £100, the tax due is £100 x 30% x 1/6 = £5.00. This is the amount of VAT due as output tax.

Alternatively, if D produces a figure of 70%, this means that 70% of the income from spectacle sales is attributable to taxable supplies. Using the same example as above, the tax due is £100 x 70% x 1/6 = £11.66. This is the amount of VAT due as output tax.