VAT for Pharmacies: Schemes, Deadlines and Compliance

VAT compliance is a significant part of running a pharmacy in the UK. It is also one of the most complex areas of financial management for pharmacy owners. Unlike other retail businesses, pharmacies must navigate various VAT treatments. This includes VAT-exempt, standard-rated, and zero-rated supplies, collectively known as partial exemptions. As a result, VAT calculations and returns can become quite complicated.

Failing to account for VAT correctly can lead to cash flow issues and tax penalties. Unexpected liabilities can create unnecessary financial stress on the business. The NHS Prescription Pricing Division (PPD) statements arrive two months in arrears. Consequently, pharmacy owners must accrue, calculate, and submit VAT before these statements arrive.

Monthly VAT submissions can be time-consuming and challenging. Incorporating accruals of sales requires an expert pharmacy accountant to ensure accurate VAT treatment and avoid errors. For cash flow purposes, community pharmacies often aim to reclaim VAT monthly. This allows them to receive substantial refunds against their zero-rated services in one transaction. The average VAT refund can reach up to £50,000 monthly for a medium-sized pharmacy.

This guide addresses the VAT challenges pharmacy owners frequently encounter. It discusses the available VAT schemes and strategies to manage VAT, which can help reduce purchase liabilities and maximize input VAT reclaims, all while remaining HMRC compliant. Additionally, it explores the virtual VAT services and tax consultancy offered by RX Virtual Finance, which aim to streamline VAT compliance and enhance financial efficiency.

Key Points

✔ VAT is essential for pharmacies. Unlike other businesses, pharmacies have a mix of VAT-exempt, standard-rated and zero-rated supplies and partial exemption on sales, so VAT classification is complex.

✔ Misclassifying VAT is a significant financial cost and risk to HMRC investigation. Pharmacies may overpay or underpay VAT, and HMRC will review & penalise inaccuracies that can cause cash flow issues.

✔ NHS and private prescriptions have different VAT treatments. NHS prescriptions are VAT exempt, and private prescriptions are 20% VAT unless exempt.

✔ Over the counter (OTC) products have different VAT rates. Some medicines are zero-rated, and cosmetics, toiletries and supplements are 20% rated. Whilst other items like contraceptions are 5%

✔ Private healthcare services are or may be VAT-exempt. Medical services like vaccinations are exempt yet consultation fees are 20% rated. Correct classification is required

✔ Pharmacies must comply with HMRC VAT deadlines. Quarterly VAT returns are due one month and seven days after the period ends. You must register as a vat registered business if the turnover is >£90k.

✔ Making Tax Digital (MTD) is compulsory for VAT submissions. Pharmacies must register and use HMRC-authorised digital accounting software like Xero to automate and be compliant with MTD VAT returns.

✔ Receiving an HMRC VAT penalty for late filing requires immediate action. Pharmacies must verify the penalty, contact HMRC and pay or appeal within 30 days to avoid further fines.

✔ An expert VAT accountant ensures accuracy and tax efficiency. Working with a pharmacy VAT specialist like Rx Virtual Finance Limited reduces VAT liabilities, improves cash flow and avoids compliance issues with the tax authorities.

✔ Accurately calculating how much VAT is due or recoverable from HMRC is crucial. Pharmacies must record financial transactions accurately to ensure correct VAT submissions and avoid penalties.

RX Virtual Finance offers professional VAT return & consultancy services for the UK pharmacies.

Understanding VAT for Pharmacies

Pharmacies play a crucial role in the healthcare sector. Understanding VAT is essential for effective financial management. VAT, or Value-Added Tax, is a consumption tax levied on the value added to goods and services at each production and distribution stage. Pharmacies must register for VAT if their annual turnover exceeds the VAT threshold, currently set at £90,000 for 2024/25. However, even if a pharmacy does not meet this threshold, voluntary registration can offer several benefits.

Pharmacies play a crucial role in the healthcare sector, and understanding VAT is essential for financial management. VAT, or Value-Added Tax, is a consumption tax levied on the value added to goods and services at each stage of production and distribution. Pharmacies must register for VAT if their annual turnover exceeds the VAT threshold, currently set at £90,000 (2024/25). However, even if a pharmacy does not meet this threshold, voluntary registration is an option that can offer several benefits.

One significant advantage of being VAT registered is the ability to reclaim VAT on many tax-deductible expenses, such as business purchases, services, and goods. This can help reduce overall costs and improve cash flow. It is crucial to note that VAT cannot be reclaimed on personal expenses or entertainment. To ensure successful claims, pharmacies must keep accurate records of VAT invoices and receipts. Proper documentation is vital for reclaiming VAT and remaining compliant with HMRC regulations.

Common VAT Issues Faced by Pharmacies and How They Affect Financial Stability?

Confusion Over VAT Treatment on NHS and Private Prescriptions

Pharmacy VAT obligations depend on whether they dispense NHS or private prescriptions, which commonly causes VAT errors.

• NHS prescriptions are VAT exempt; no VAT is charged when dispensing medicines under an NHS contract.
• Private prescriptions are 20% VAT unless the medicine itself is VAT-exempt.
• Dispensing doctors and pharmacies handling veterinary prescriptions also need to determine the correct VAT rate, which adds further complexity.

Many pharmacy owners incorrectly classify private prescriptions as overpaying or underpaying VAT, which can be discovered during an HMRC review.

Pharmacies should work with specialist VAT accountants who understand the dispensing VAT exemptions and can ensure accurate categorisation of NHS vs private prescription VAT treatment. Only the amount of recoverable VAT based on valid documentation should be included in VAT returns.

VAT Complications on Over-the-Counter (OTC) Medicine and Retail Sales

Pharmacies also sell OTC medications, healthcare products and other retail goods, making VAT treatment even more complicated.

• Some medicines are zero-rated (e.g., certain painkillers, and vitamins prescribed by a doctor), while others are 20% rated.
• Non-medicinal products like skincare, toiletries, cosmetics and food supplements are always 20% VAT.
• Medical devices and first aid products are VAT-exempt if they meet HMRC’s medical exemption criteria.
• Reduced-rate VAT 5% Contraception, Tabacco replacement, & Maternity Products are only 5%

Pharmacies must also account for import VAT on retail goods. They should include import VAT in their VAT returns through methods like Postponed Import VAT accounting (PIVA) and ensure they have the correct documentation to claim it.

Incorrect classification of goods can lead to under-claimed sales VAT reclaims or overpayment on 20% rated items. This can significantly impact profit margins and cash flow.

Leading medicines suppliers, making up 80% of the Pharmacy’s stock, have complicated statements and invoices. For example, suppliers such as AAH, Lexon, and Alliance Healthcare may send out hundreds of purchase invoices per month. An expert accountant will be able to analyse the multiple VAT types on their monthly statements to simplify the reporting and save considerable amounts of time in bookkeeping.

Thousands of purchase invoices are sent to local pharmacies for payment throughout the year. With our specialised invoice capture software, Hubdoc and Dext at RX, we can log all purchase invoices digitally. This allows pharmacy owners to save significant amounts of space and eliminates the need to archive hard-copy records for the required six-year period.

Pharmacies should keep accurate VAT records, update product VAT classifications regularly and work with a pharmacy VAT consultant to optimise tax efficiency. With so many changes in government, VAT regulations are frequently changing. To ensure you stay compliant, our team of VAT consultants stay up to date with any changes in regulations so you don’t have to.

VAT Considerations for Pharmacy Services Such as Travel Clinics, Flu Jabs and Diagnostics

Many pharmacies offer private healthcare services such as:

• Travel vaccinations and immunisations
• Earwax removal
• Blood pressure monitoring and cholesterol testing
• Flu jabs and menopause consultations
• Weight management and smoking cessation programs

VAT treatment: Medical services a pharmacist provides (e.g. administering a vaccination) are VAT-exempt. The varying VAT implications apply to various services supplied during medical consultations and treatments, highlighting the importance of accurate VAT categorisation.

• Private Ancillary services (e.g. private consultation fees, health assessments) are 20% rated.

Misclassifying VAT on healthcare services can lead to underpaid VAT and HMRC fines during investigations.

Superintendent Pharmacists & Pharmacy owners should consult with VAT experts to structure their services tax-efficiently and ensure correct VAT categorisation covering all areas.

VAT on Home Delivery Services and Online Pharmacy Sales: How to Reclaim VAT

With the rise of online pharmacy ordering, e-commerce, and home delivery, VAT has become even more complex.

• Delivery fees on NHS medicines are VAT-exempt.
• Delivery charges for 20% rated items (OTC products, supplements) are also 20% liable.
• Subscription-based pharmacy services (e.g. monthly prescription deliveries) may have different VAT implications.

Pharmacies can reclaim VAT paid on delivery-related expenses such as fuel, which can help reduce taxable profits and improve cash flow.

Incorrectly accounting for VAT on delivery fees can lead to misreported VAT liabilities and HMRC disputes.

Pharmacies should ensure their e-commerce VAT system is compliant and automate VAT calculations using specialist VAT software. At Rx, we work with our Pharmacy clients to ensure that the point-of-sale till is correctly set up to account for the hundreds of Over-the-counter product sales. These EPOS till systems commonly integrate their software with our Accounting Software, Xero. Again, the team at RX works with our clients to ensure this integration is set up accurately.

VAT on Group buying, Purchase commissions, & Supplier Credit Notes?

Many pharmacies join buying groups to purchase medicines together. They can get better supplier deals and discounts by buying as a group. Two well-known groups that help pharmacies do this are the Cambrian Alliance and Pharmacy Friends. Be Careful to post the VAT on these discounts correctly,as they are reversed from standard purchase invoice VAT.

Pharmacies can negotiate special deals with big suppliers like Lexon, AAH, and Phoenix. When they promise to buy over a certain amount of products each month, these suppliers give them substantial discounts on a Quarterly basis. These discounts may show up on their invoices or as separate credit notes. Please be careful—the VAT works backwards on these discounts compared to regular supplier invoices.

Pharmacy suppliers often issue credit notes for damaged stock, incorrect deliveries, out-of-stock items, or returned medicines. Unlike standard invoices, these credit notes have different VAT treatment, complicating accounting. Keeping track of them, ensuring they’re received, and posting them correctly can be time-consuming. RX Virtual Finance helps to stay on top of these credits and post the Stock Credit note VAT treatment correctly.

VAT Rates and Schemes

Navigating VAT rates and schemes can be complex, so pharmacies need to understand the different rates and schemes that apply to their business. The standard VAT rate is 20%, yet some goods and services are subject to a reduced rate of 5%, whereby the Prescriptions issued by a GP are zero-rated. For instance, certain medications and medical supplies may be zero-rated, while other products like cosmetics and supplements are typically standard-rated.

Pharmacies must also be aware of the various VAT schemes, such as the Flat Rate or Cash Accounting schemes. These schemes can simplify VAT accounting and potentially offer financial benefits. For example, the Flat Rate Scheme allows businesses to pay a fixed percentage of their turnover as VAT, which can simplify calculations and reduce administrative burdens. Most pharmacy clients choose to be on the standard-rated scheme, applying partial-exemption criteria and reporting every month. Yet this may vary and would be discussed with the RX virtual Tax team at the signup – onboarding stage.

Pharmacies can use registered MTD software such as Ob-Serve, Xero, Sage, and Quickbooks to ensure correct VAT calculations. The in-depth and complex analysis is built into the online VAT calculators within this software to add or remove VAT at various rates for input & output VAT. These tools are invaluable for ensuring accurate VAT calculations on sales and purchases.

Our MTD-ready software Xero also provides an entry-by-entry clear audit trail of each transaction, which is required by HMRC to be attached to the VAT returns when filed online. In case of an investigation, this considerably reduces time and costs as HMRC readily accept and appreciates the detail and accuracy provided by XERO in their backing paperwork/audit trail that is analysed both by VAT type and Transaction type.

To familiarise yourself further, HMRC provides comprehensive guidance on calculating VAT, and pharmacy company owners should review these resources to ensure they apply the correct rates to their transactions. This detailed guidance can be found at HMRC Vat notices 706 and 701/57. We also recommend looking up YouTube videos on VAT under the HMRC & Tolley Tax Channels to further help with self-learning on VAT.

HMRC Dates for Pharmacy VAT Returns

Registered businesses must file returns electronically and comply with the Making Tax Digital initiative, emphasising the importance of meeting submission deadlines. At Rx, we recommend using the Xero software, an MTD-ready VAT filing application.

Pharmacy owners should be aware of key VAT deadlines to avoid penalties and ensure compliance:

• Quarterly & Monthly VAT Returns – Filing is due one month and seven days after the end of each VAT period. (Most commonly used in the retail pharmacy business)
• Annual Accounting VAT Scheme Payment Deadlines – If you are on the annual scheme, payment instalments must be made quarterly throughout the year. You must file two months after the end of the year.
• Making Tax Digital (MTD) Compliance Dates – Pharmacies must submit VAT returns and detailed backing works digitally as part of the filing. Ensure that you use HMRC-compatible MTD filing software.
• VAT Registration Deadline – If turnover exceeds £90,000 in the historic 12-month period, pharmacies must register for VAT within one month after the end of the month you exceeded the limit. (Rx advise all new pharmacies to register on day one of trading for numerous reasons)
• VAT Deregistration Deadline – Pharmacies below the threshold must apply for deregistration online within 30 days of falling below the £88k threshold.

Not meeting these deadlines results in penalties, interest charges and red flags that lead to HMRC investigations.

Making Tax Digital (MTD) and How Digital VAT Submission Can Benefit Pharmacies

What is Making Tax Digital (MTD)?

Making Tax Digital (MTD) is a UK government initiative requiring businesses to maintain digital VAT records and submit returns electronically to HMRC. This online system reduces tax errors, ensures timely payments to the tax office (monthly, quarterly, or yearly), and minimises fraud by electronically transmitting supporting bookkeeping documentation alongside returns. The streamlined process creates greater transparency and accuracy in tax reporting while simplifying business compliance.

How to Submit VAT Digitally Under MTD

Pharmacies must:

• Keep real-time digital records of VAT transactions.
• Use MTD-compatible software to submit returns.
• Ensure VAT submissions are compliant with HMRC regulations.
• Manage VAT accounts effectively to handle the complexity of diverse purchasing and sales activities and interactions with other organisations.

How Xero Helps with Automated and Accurate VAT Returns

Xero is an MTD-compliant accounting software that helps pharmacies simplify VAT management by:

• Automating VAT for NHS and private sales.
• Tracking input and output VAT for accurate returns.
• Providing real-time VAT insights to prevent cash flow issues.

Using Xero and Rx Virtual Finance’s VAT Services, we become your tax agents dealing with HMRC-related VAT queries and administration, so you don’t have to. Saving pharmacists more time, eliminating errors, improving compliance, and submitting returns on time.

Reclaiming VAT

Reclaiming VAT is crucial for pharmacies to recover the VAT they have paid on purchases, Sales credits, and commissions. To reclaim VAT, pharmacies must retain valid proof of purchase, typically a VAT invoice displaying the amount paid. This documentation is essential for substantiating VAT claims. Our Digital Software Hubdoc & Dext enable online soft copies to be recorded for all invoices.

Pharmacies can reclaim VAT by submitting a VAT return to HMRC, usually monthly or quarterly. This involves detailing the VAT paid on purchases (input VAT) and the VAT charged on sales (output VAT). Online accounting services like Xero, Sage, Quickbooks & FreeAgent can streamline this process by allowing pharmacies to file their VAT returns directly with HMRC. These platforms offer a convenient and efficient way to meet VAT obligations, ensuring all necessary information and documentation are in place before submission. The refund is paid out within 14 days of the return filing. Usually, when a newly registered pharmacy files a refund for the first Qtr, HMRC asks for proof of documentation to back up the refund. Then, it’s plain sailing for each return after this has been proven.

Partial Exemption and Related Costs

Partial exemption is a complex area of VAT that can significantly impact pharmacies. It occurs when a pharmacy makes taxable and exempt supplies, meaning they can only reclaim a proportion of the VAT incurred on related costs. This requires careful calculation to determine how much of the VAT incurred on business overheads and purchases can be recovered.

Pharmacies can use the standard partial exemption method to calculate the recoverable VAT. This involves distinguishing between taxable and exempt supplies and applying the appropriate rules to determine the proportion of VAT that can be reclaimed. The liability rules detailed in HMRC’s guidance should be used to categorise supplies and calculate the recoverable VAT accurately.

HMRC and the Department of Health also apply an apportionment of VAT and VAT types against the regular monthly practice payment. Again, this can be complex to post and is covered by RX Virtual Finance. This breakdown, taken from CPE, can be seen below.

Understanding and applying the partial exemption rules is essential for pharmacies to reclaim the correct amount of VAT and remain compliant with HMRC regulations. Working with a VAT expert can help pharmacies navigate these complexities and optimise their VAT recovery.

What should you do if you get a VAT penalty letter from HMRC?

Getting a VAT penalty letter from HMRC can be worrying, yet taking action now can reduce penalties, correct mistakes, and prevent future fines. HMRC have a complicated penalty points system for late filings. If you file late on more than three occasions, you can incur a £200 fine. As the community pharmacy industry generally reclaims a refund each time it files a return, they are not expected to receive late payment penalties or charges for not paying VAT on time.

1. Read the Penalty Letter

VAT penalties can be due to:

• Late VAT return – Missing the quarterly deadline.
• Late VAT payment – Not paying VAT on time incurs interest.
• VAT errors – Incorrect VAT categorisation or miscalculation. Specific financial figures, such as sales and purchases, do not include insurance claims, and misclassifying these can lead to VAT errors and penalties.
• Non-MTD compliance – VAT returns must be submitted digitally using HMRC-approved software.

Action: Read the letter and check your VAT records to ensure the letter matches what’s on your VAT account on your Business Government Gateway portal with HMRC. Also, have your accountant review this to ensure the letter is not a SCAM or Fraud letter tricking you into paying VAT taxes that are not due.

2. Verify the Penalty

• Check if VAT returns were submitted on time and payments were processed correctly.
• Check if VAT errors were genuine or an HMRC miscalculation.
• Scam & Fraudulent letters & Text messages copying HMRC requesting refunds – Double check for these

Action: If incorrect, gather evidence and appeal within 30 days.

3. Contact HMRC or Pay

• Call the HMRC VAT Helpline on 0300 200 3700 to clarify.
• Request a Time-to-Pay arrangement if you need more time to pay the fine. We are specialists in time-to-pay arrangements and have successfully helped VAT clients arrange up to three-year VAT time-to-pay plans.
• Pay promptly to avoid extra interest. This rate fluctuates and is usually much higher than the Government bank base loan interest rate.

4. Prevent Future VAT Penalties

• Use MTD-compliant software like Xero to submit VAT.
• Work with a pharmacy VAT expert to ensure correct VAT classification.
• Set up VAT reminders to avoid late submissions and payments.

Why Pharmacy VAT Expertise Matters

VAT is complex yet essential for running a pharmacy. Knowing which VAT scheme to use, keeping track of deadlines and ensuring accurate VAT classification can help pharmacies avoid penalties and cash flow problems. Policy changes have encouraged the NHS to outsource certain activities to private entities, highlighting the role of the private sector in providing healthcare services.

💡 Need VAT support? Let Rx Virtual Finance Limited handle your VAT returns and compliance, accurate filing, tax efficiency and peace of mind.

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