VAT is an important consideration for opticians, particularly because the sale of spectacles or contact lenses can involve more than one type of supply for VAT purposes. Understanding how VAT should be charged helps practices stay compliant and account for VAT correctly.

HMRC provides simplified processes for opticians and dispensers of hearing aids, making it easier for businesses to account for VAT on their supplies while ensuring the correct amount of VAT is declared. 

In this guide, Tamara Habberley, Senior VAT Consultant at The VAT People, explains these processes, why VAT apportionment matters for opticians, and what practices they should consider when deciding how to charge VAT.

Why is VAT different for opticians?

VAT for opticians differs from many other businesses in the healthcare industry because opticians often provide both healthcare-related services and taxable goods as part of the same customer transaction. While many healthcare services are exempt from VAT when supplied by appropriately qualified professionals, opticians must also consider the VAT treatment of the physical products they provide, such as glasses and contact lenses.

For VAT purposes, opticians that dispense glasses or contact lenses to customers usually make two separate supplies.

The first is the supply of the spectacles or lenses themselves. This is taxable at the standard rate of VAT.

The second is the supply of dispensing services. This element is exempt from VAT, as it relates to the professional healthcare service provided to the customer.

Because one part of the overall supply is taxable and the other is exempt, opticians need to identify how much of the customer charge relates to each element. This is known as VAT apportionment.

In practice, this means an optician cannot simply treat the full amount charged to a customer in the same way for VAT purposes. The taxable and exempt elements need to be considered separately so the correct amount of VAT is accounted for, input VAT recovery is calculated correctly, and the business can reduce the risk of HMRC challenge.

Understanding opticians’ VAT obligations

Under Revenue and Customs Brief 14 (2020), opticians are required to hold a till slip or similar evidence to demonstrate that they are making two separate charges to the customer at the time of supply, and that this information is being conveyed to the customer.

In addition, those using a method of apportionment don’t need to seek prior approval from HMRC before operating that method. This brings opticians more closely into line with other businesses that apportion VAT on their sales.

However, opticians still need to ensure that their method is appropriate, that it is applied consistently, and that suitable records are kept.

What VAT apportionment methods are available?

Opticians are generally eligible to use either a full-cost apportionment method or a separately disclosed charging method. The right approach will depend on how the practice charges its customers and how its systems record those charges.

Full-cost apportionment method

The full-cost apportionment method is used where an optician makes a single charge for the supply of spectacles and dispensing services.

Where a single price is charged, the optician needs to apportion that income between the taxable supply of spectacles or lenses and the exempt supply of dispensing services. The aim is to ensure that VAT is only charged on the taxable element.

Historically, this method would have needed to be agreed with the local VAT business advice centre. Following HMRC’s changes, prior approval is no longer required before using an apportionment method. However, the method used should still be fair and reasonable.

It is also important that the method is reviewed at least every three years, or sooner if there are significant changes within the business. For example, a change in pricing structure, operating model, services offered or customer base could all affect whether the existing apportionment remains appropriate.

Opticians should be able to explain how the apportionment has been calculated and demonstrate why the method used produces a fair result.

Separately disclosed charging method

The separately disclosed charging method applies where the optician makes separate charges for the spectacles or lenses and the dispensing service.

In these cases, the optician does not need to perform an apportionment of the charges for spectacle sales, because the taxable and exempt elements are already separately identified.

However, the separate charges must be made clear to the customer at the time of supply. This may be shown on a till slip, invoice or similar evidence. The key point is that the customer should be told what they are being charged for each element.

This can require careful handling because dispensing services are often closely connected with the supply of spectacles. However, HMRC will accept that separate considerations have been established, provided the charges are stated to all patients at the time of supply.

Opticians using this method should ensure that their pricing information, till systems and customer documents support the VAT treatment being applied.

What evidence should opticians keep?

Although HMRC has simplified the process, opticians still need to keep clear and accurate records. These records are important if HMRC ever reviews the practice’s VAT treatment.

Useful evidence may include:

• Till slips or invoices showing separate charges
• Pricing information given to patients
• Records explaining how any apportionment method has been calculated
• Evidence that the method is reviewed regularly
• Details of any business changes that may affect VAT treatment
• Records showing how input VAT recovery has been calculated

Keeping this information in an organised way can help reduce uncertainty and make it easier to demonstrate compliance.

How can opticians reclaim VAT?

VAT recovery should also be considered because practices may make both taxable and exempt supplies.

In broad terms, VAT incurred on costs directly linked to taxable supplies may be recoverable, while VAT incurred on costs directly linked to exempt supplies may not be. Where costs relate to both taxable and exempt activities, an apportionment may be needed to work out how much VAT can be reclaimed.

This can apply to overheads and mixed-use costs such as rent, utilities, professional fees, equipment, marketing, software and other operational expenses.

For new practices, it is particularly important to consider VAT from the outset. Before opening, opticians should understand the VAT liability of their supplies, establish the value of their dispensing services, and consider the proportion of VAT that can be recovered on set-up and operational costs.

For existing practices, it is worth reviewing whether the current VAT treatment remains suitable, especially if pricing, systems or business activities have changed.

What common VAT mistakes should opticians avoid?

VAT errors can be costly, so opticians should take care to avoid common mistakes such as:

• Treating the whole supply as either taxable or exempt
• Failing to tell patients about separate charges at the time of supply
• Using an outdated VAT apportionment method
• Failing to review the apportionment method after changes to the business
• Keeping insufficient records to support the VAT treatment applied
• Misunderstanding how much input VAT can be reclaimed

Because opticians often make both taxable and exempt supplies, the amount of VAT they can recover may need to be apportioned correctly.

Taking advice early can help prevent errors and ensure the practice is accounting for VAT correctly.