Dealing with VAT

Dealing with VAT in Pharmacy

The way in which pharmacists must deal with value added tax (VAT) makes the pharmacy industry unique.

The golden rule of any business is that 'cash is king' - pharmacy is no different. However, while VAT is charged on most products sold or dispensed via a pharmacy, the PPA only refunds the cost of the drugs and not the VAT element. Therefore, almost all independent pharmacists find themselves in a net reclaim situation and if the Vat is not done monthly to claim reimbursement for the tax element already paid to the supplier, then cash flow difficulties may soon ensue.

When an Inspector calls

The Tax Office can and will descend at any time but in most cases visits are routine. Ultimately inspectors are looking to ensure the business is correctly accounted for and periodic visits form part of this process. So don't be alarmed when an inspector calls.

To help you and ensure the visit is relatively painless, have the entire relevant documents ready prior to their arrival. These should include annual accounts, VAT records, VAT returns, bank statements, invoice receipts, delivery receipts and so on.

Remember that while the inspectors are normally entitled to look back over the last six years, they can actually demand to see records of accounts for the last 20 years. Therefore, you are obliged to keep details for the longer period.

Ensure that all files are organised, file logically - with invoices in date or number order - and most importantly, check that the VAT details match your accounting details at all times. Consider employing an accountant or VAT specialist to take care of this side of the business. This should ensure that good practice procedures are used which will aid smooth inspections later.

The inspectors do have very wide powers. They may demand to inspect the premises and in some cases they can even request to inspect the home. They also have the power to remove documents but if they do wish to do this, then try to ensure photocopies are taken. Be aware that it is your right to have your own accountant present during any part of the inspection.

What About Mistakes?

VAT is complicated and you are not expected to know every last detail. Inspectors do appreciate this fact and are usually very helpful. If you have any problems, telephone your local inspector for guidance. Alternatively, ask your accountant.

Under Declared or Over Declared?

If a genuine error has occurred in your calculations, be it an over declared amount of more significantly an under declared amount, don't panic. Just be honest. There is a safety net in place, which allows you to make additional payments or obtain repayments of the sum, which has been over declared. However, do watch out for penalties, which will be enforced for a persistent lack of or poor accounting procedures.

Any Objections?

Once the inspection is complete and you have been notified of the results, ensure that you check and double-check the findings. Remember, everyone can make mistakes and you are fully entitled to disagree if you feel an error has been made. However, it is up to the individual to notify the Tax Office of any objections.

You have two options in this case. Firstly, you will be able to formally ask for another assessor to revisit the business for a second check, or you will be able to seek an independent view, the details of which will need to be clarified on an individual basis with the Tax Office.

Summary

• 'Organisation is key' - the neater the filing system, the less painful the inspection
• 'Record, record, record' - ensure all transactions have records and then ensure these records are filed logically, i.e. store invoices by date or invoice number
• 'VAT must match accounts' - ensure you VAT records match your accounts details at every point in time
• 'Get a professional - look for a qualified accountant with a good reputation who can provide a good VAT service
• 'Cash is king' - produce monthly VAT returns rather than quarterly to ensure cash flow is efficient
• If in doubt contact your local Tax Office.

Finally, being a pharmacist is a demanding task on its own. The area of VAT is complicated and time consuming and therefore you should seriously consider outsourcing this responsibility to your accountant. The fee is usually considered to be modest in comparison to the burden lifted. You will almost certainly add more value to your business by excelling as a pharmacist than you will by becoming a VAT expert!