Most businesses can reclaim VAT on the goods and services they purchase – but does the same apply to dentists?
Put simply, the answer is yes, but only in certain circumstances.
Most dental services are VAT exempt, which means it’s not possible to reclaim VAT on the goods and services used to provide them. However, understanding the implications of added tax and value added tax is crucial for dental practices, especially regarding compliance and the differentiation between taxable and VAT-exempt services.
But some services and products that don’t form part of a health programme might be standard-rated.
If your dental practice makes both exempt and non-exempt supplies, and incurs tax on costs which relate to both, you’ll have a partial exemption and might be able to recover some, or all, of your VAT.
VAT rules and partial exemption
Businesses with a taxable turnover exceeding the VAT threshold of £85,000 are required to register for VAT and start collecting and paying VAT to HMRC. Compliance with VAT rules is crucial to avoid financial penalties and increased scrutiny. At this point, they can also start reclaiming the VAT they’ve paid on supplies they buy (known as ‘input tax’).
Many dentists are below this VAT-registration threshold because the majority of services they provide are exempt from VAT. You can choose to register voluntarily, however, and claim back input tax that way.
You can normally recover input tax relating to taxable supplies you make, as well as supplies you make outside the UK that would be taxable if they were made in the UK. Accurate and timely VAT returns are essential to manage tax obligations and avoid potential penalties.
You can also recover certain exempt supplies that are specified by Treasury Order, although these mainly apply to the financial or insurance industries.
In some cases, you might not be able to recover the input tax you’ve paid on supplies. This is known as ‘blocked’ input tax.
Exempt and taxable dental services
Dental care services provided by registered professionals including dentists, dental hygienists, dental therapists, dental nurses and dental technicians are exempt from VAT.
To be exempt, the services you provide must be within the profession in which you’re registered to practice, and their primary purpose must be to protect, maintain or restore the health of the person receiving the service. Treatments provided solely for aesthetic reasons, such as cosmetic treatments, do not qualify for VAT exemption.
Under those rules, most dental supplies are likely to be exempt, including care and treatment, drugs or appliances provided as part of that treatment, and dental prostheses such as dentures, artificial teeth, and so on.
Apart from those prostheses, anything that’s separable from the dental treatment itself will usually be standard-rated: for instance, any toothbrushes, toothpaste and dental floss you sell.
This could also include advisory services, such as those supplied by dentists on a self-employed basis to clinical commissioning groups.
Purely cosmetic services, however, are considered by HMRC “on a case-by-case basis”. These can be exempt if they’ve been supplied as an element of a healthcare treatment programme by a registered health professional. The classification of treatments is crucial for compliance and financial planning within the dental sector.
Toothbrush schemes and the ‘de minimis’ rule
If you’ve incurred a small amount of exempt input tax, it’s possible to treat it as if it were taxable and recover it in full if its total value is less than a prescribed amount. The benefit of this ‘de minimis’ rule is that it simplifies financial management for dental practices, allowing them to focus on growth.
That amount is known as ‘de minimis’, and allows businesses to recover blocked VAT if it is less than £625 per month.
This rule backfired somewhat when it was first introduced, leading to the rise of so-called ‘toothbrush schemes’, where otherwise exempt businesses began to reclaim VAT on the basis of a small number of taxable sales they made – toothbrushes or toothpaste at a dental practice, for example. Alternatively, practices could choose to have the funds sent directly to their accounts, providing flexibility in managing finances.
To prevent those schemes, the rules were changed so that the exempt input VAT also had to be below 50% of the total input VAT, ensuring that income from exempt services did not disproportionately benefit from VAT recovery.
In April 2010, HMRC introduced new tests for businesses to work out whether their blocked input tax falls under the de minimis limit. You can read more about these here, or get in touch with us for more information.
Effective financial planning and cash flow management are crucial for supporting sustainable growth in dental practices.
How much can you reclaim?
Working out exactly how much you can reclaim is a complex process, and generally best left to an experienced tax professional. Seeking advice from a tax professional can help ensure you navigate the complexities effectively.
As a broad outline, though, the three main steps are:
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Direct attribution of input tax: Identifying the VAT incurred on purchases that you use, or intend to use exclusively in making taxable and exempt supplies.
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Apportionment of residual input tax: Maintaining compliance involves managing residual input tax on purchases used to make both taxable and exempt supplies. We’ll work out how much of this you can recover.
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Annual adjustment: Reviewing the input tax you’ve claimed in different periods across the tax year.
Dental practices operate within a specific VAT framework, distinguishing between VAT-exempt NHS services and taxable private services.
You can use a ‘standard method’ to calculate how much of your residual input tax is recoverable without having to seek HMRC’s approval. This ensures that VAT measures do not adversely impact dental patients by preventing unnecessary price increases.
If you don’t think this method provides a fair and reasonable result, however, you can apply to use a special method.
Whichever method you use, you should keep a record of your exempt sales and how you’ve worked out how much VAT to reclaim. Understanding your VAT position is crucial for accurate record-keeping and strategic planning.
To talk to us about VAT for dentists or for any other financial matters related to running a dental surgery, have a look at our accounting services for dentists or contact us for more information.
