This would be an excellent example of direct allocation vs indirect allocation of input tax where the operator makes some taxable supplies, but additionally exempt supplies and the input tax allowance for charge-backs is apportioned according to the ratio of taxable supplies over turnover.
Many dentists offer standard-rated cosmetic procedures (e.g. teeth whitening, veneers for purely aesthetic reasons, dermal fillers), as well as exempt services (routine check-ups, fillings, restorative work, and dentures designed to protect, maintain, or restore health). As a partially exempt trader, VAT filing returns need to correctly attribute allocations of cost vs output on billable services, and they may qualify to recover some of their input tax although their primary service offering is exempt for VAT purposes.
Let’s look at the Legislative Requirements
The standard method described in this scenario could be applied to dentistry where there are aspects of public and private practice, where a proportion of indirectly allocated (residual) revenue comprising taxable supplies can be reclaimed on the input tax on the dentistry practice.
Additionally, there are special methods where different outputs are used as proxies for standard-rated supplies which apply in situations where, for example, high value transactions are undertaken which consume inputs to an extent significantly greater than transactions of a lower value; or where payment receipts on costs recorded in the cashbook lag the invoice due date distorting the level of output tax logged at the tax point of the invoice. Alternative apportionment methods might utilise output values and/or number of transactions to determine the taxable threshold on residual allocation of taxable vs exempt supplies. Other proxy values might comprise cost allocations, to determine which business divisions are predominantly taxable or exempt; or management accounts, to drill down into admin overheads on managing concurrent business divisions.
All charge-backs claimable on residual or unallocated input tax allocations are subject to the de minimis threshold, which is set at £625 per month and where the value of exempt supplies is no more than 50% of the value of all supplies. A regular ‘historic test’ must be conducted where the monthly value of supplies is subjected to the de minimis requirement backdated twelve months i.e. over the last tax year, and an annual adjustment must be made based on use of taxable supplies and how it has changed in the context of cost allocations.
Partly exempt businesses can seek approval of a special method, during:
- Your ‘registration period’, the period ranging from the date you were first registered for VAT to the day before the start of your first tax year (normally 31 March, 30 April or 31 May depending on the periods covered in your VAT Returns.
- Your first tax year (normally the first period of 12 months commencing on 1 April, 1 May or 1 June following the end of your registration period), provided you did not incur input tax relating to exempt supplies during your registration period.
- Any tax year, provided you did not incur input tax relating to exempt supplies in your previous tax years.
Once this period has expired, you must revert to using the normal “standard” method calculation based on the values of your supplies, and may still recover input tax using the standard method, or seek approval for a special method if you prefer.
Where the standard method does not produce a fair and reasonable deduction of input tax, you may be subject to a standard method override where the use or intended use of taxable supplies differs substantially from the deduction made using the standard method to these supplies. A difference is classed as substantial if it exceeds £50,000 annually and/or exceeds 50% of the residual tax incurred and £25,000 per year if the group undertakings are not part of the same VAT group.
The override does not apply:
- If you carried out your annual adjustment on the basis of use.
- To any input tax you were required to attribute on the basis of use.
To apply the override you need to compute the difference between the input tax deductible under the standard method and that deductible according to use. Any costs which are not incurred in the same relationship between values of supplies may be addressed separately from the principal calculation.
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