Pharmacies and VAT
The goods and services supplied by your business will be either taxable or exempt for VAT purposes.
You must register for VAT once your taxable supplies have reached the current VAT threshold. You will have to charge VAT on the goods you sell - this is known as 'output tax'. You will be able to reclaim any VAT you pay on purchases - this is known as 'input tax'.
There are two main rates of VAT:
- standard rate
- zero rate
In addition some goods such as condoms, sanitary protection for women or smoking cessation products are subject to a reduced rate.
Every quarter you will pay HM Revenue & Customs (HMRC) the difference between:
- the output tax you have charged, and
- the input tax you have paid on your purchases
Nearly all businesses have to pay their VAT bill electronically - for example by direct debit or online banking. HMRC allows you some time at the end of each quarter before you have to pay the VAT due. So, for example, the VAT due on sales made in months one, two and three would be paid at the end of month four. Your VAT return will show your payment deadline date.
Businesses that are having trouble making their VAT payments, or are worried that future payments will cause them problems, can ask for help from the HMRC Business Payment Support Service. If your business needs this financial assistance to tide it over, HMRC will look at your situation and discuss temporary options that could help out. These could include letting you make payments over a longer period and waiving late payment surcharges. To discuss payment problems with HMRC you can call the Business Payment Support Service Helpline on 0300 200 3835.
Standard or zero rated?
Zero rated supplies include the dispensing to a patient by a registered pharmacist of drugs, medicines or other items which have been prescribed by a doctor or dentist, either privately or on the NHS. Many items of food and drink for human consumption are also currently zero rated, as are books and some sports and athletics foods and drinks.
Medications which are not supplied on prescription fall outside the scope of the zero rating provisions and so these are standard rated. Some of the essential services, such as signposting and the disposal of unwanted medicines, are standard rated. Many of the goods sold in the pharmacy shop (such as toiletries, cosmetics, photographic goods and so on) are also standard rated.
Exempt supplies include the professional services of a registered pharmacist, including any advanced services provided and the promotion of healthy lifestyles (part of the essential services).
You can find out more about the VAT liability of the services and products you provide on the Pharmaceutical Services Negotiating Committee (PSNC) website.
Because the position can be complex you may find it helpful to consult the VAT Helpline on 0300 200 3700 for guidance. They will be able to advise you and send you some helpful free publications including VAT Notice 701/57 Health Professionals and pharmaceutical products. VAT publications are also available on the Gov.uk website.
The helpline will also be able to advise you on using one of the Retail Schemes. These schemes are used by businesses which deal mainly with members of the public. Because VAT is payable at the standard rate on purchases of drugs which may then be zero rated when supplied on prescription, special adjustments to the retail schemes calculations have been agreed with the National Pharmaceutical Association. The adjustments are outlined in Section 9 of VAT Notice 727.
Your market research will have helped you to estimate your sales income every month. Now decide what proportion of those sales might be of standard rated items so that you can estimate approximately how much VAT you will pay every quarter.
Making Tax Digital (MTD) for VAT
Under HMRC's Making Tax Digital initiative, VAT-registered businesses with taxable turnover above the VAT threshold must keep records digitally and use special software to submit their VAT returns. You can find out more about MTD on the Gov.uk website.
Alternative flat rate scheme
You might be interested in an optional flat rate scheme (FRS) for eligible small businesses. Under this scheme you continue to issue tax invoices to VAT registered customers, but the VAT payable every quarter is calculated as a percentage of your VAT-inclusive turnover. You apply the appropriate flat rate percentage for your type of business. However, this scheme cannot be used with the retail schemes, the margin scheme for secondhand goods or the cash accounting scheme. You can find full details of the FRS, who can use it, and the flat rate percentages in VAT Notice 733, Flat rate scheme for small businesses. It will help you to decide whether or not the scheme is suitable for you.