VATVAL12400 - Specific applications: Opticians: A worked example of an apportionment method

Below is an example of a full cost apportionment method (FCAM), which is one method opticians can use to calculate the proportion of their sales income that is attributable to taxable supplies. HMRC officers should be aware this example is included only as an illustration. The calculations used are not the only ones which can be used to operate a FCAM. It is not a standard method for all opticians. Each optician’s practice must use a method that provides a fair and reasonable apportionment of its sales.

General guidance on apportionment, and examples of alternative calculations, can be found in section 31 of VAT Guide: VAT Notice 700.

Worked example

(i) Cost of goods

(Total cost of frames and lenses / Number of spectacles dispensed [new and reglazed] in period) = A

(ii) Cost of Optometrist relating to spectacle sales

(Spectacle sales income X Direct cost of Optometrist) / Spectacle sales income and sight test fees = B

Note: Another calculation may be more appropriate for calculating the proportion of the Optometrist’s costs that can be attributed to the dispensing service. It is the responsibility of each opticians’ practice to determine which calculation is most appropriate to them.

(iii) Cost of service per unit

(B + Direct cost of Dispensing Optician + Non registered person) / Number of spectacles [new and reglazed] dispensed in period = C

(iv) Calculation of percentage of income from spectacle sales attributable to taxable supplies

(A / A+C) X 100 = D (to two decimal places)

If D is 60%, this means that 60% of the income from spectacle sales is attributable to taxable supplies. For example, if a pair of spectacles is sold for £100, the tax due is £100 x 60% x 1/6 = £10.00. This is the amount of VAT due as output tax.

Notes on steps in the calculation

Cost of Goods

In order to establish the cost of the goods, opticians will need the following information:

  • The number of spectacles dispensed in the period;
  • The cost of purchase of frames;
  • The cost of purchase of lenses. If practices purchase blank lenses and glaze them “in-house”, the cost of the glazing function including any directly attributable expenses incurred on consumables used in glazing. Indirect costs, such as depreciation on fixed equipment, must not be included; and
  • The cost of delivery if the spectacles/frames/lenses are delivered from a central point of distribution to a chain of outlets. However, if other goods (such as contact lens fluids, cases, chains, etc.) are included in the deliveries, the proportion of the cost that relates to those items is excluded.

Note: Opticians may include spectacle cases or other items within the overall cost of the sale of a pair of spectacles. Opticians may include spectacle cases or other items within the overall charge for the sale of (or price of) a pair of spectacles.

Cost of services

In order to perform the apportionment, the optician will need to establish the cost of the services.

An optician’s practice may have optometrists, Dispensing Opticians (DO) and supervised non-registered persons involved in the dispensing of spectacles. An optometrist carries out sight tests and also dispense spectacles, whereas a DO only dispenses spectacles. (Guidance on exemption for services can be found here).

Their direct labour costs will need to be established. Conventional accounting procedures should be used to determine the costs incurred in making the exempt dispensing supplies. See (4) below for more information on what is meant by “direct costs”.

1. Optometrists

Only the proportion of the cost of an optometrist that is attributable to the exempt dispensing service element of spectacle sales is to be included in the spectacle apportionment calculation. The proportion of the costs relating to exempt eye test, and various administrative, managerial or other “non-medical” activities associated with running the business, must not be included

The worked example above contains one possible formula for calculating the optometrist’s costs that can be attributed to the dispensing services. Other formulas may be used if they are more appropriate and provide a more accurate result.

For example, if an optometrist spends half their time providing sight tests and the other half dispensing, it would be more appropriate to simply use half their costs for the purposes of the apportionment calculation.

2. Dispensing Opticians

Opticians will need to calculate the direct labour costs for the time DOs spend in the dispensing of spectacles. The labour costs of other activities carried out by DOs must not be included.

3. Supervised non-registered persons

A proportion of the direct labour costs relating to the time supervised non-registered persons provide a dispensing service may also be included in this part of the equation.

4. Direct Costs

The direct costs include (this is not an exhaustive list):

  • Salary
  • Employers’ National Insurance Contributions
  • Pension contributions by employer
  • Cost of provision of vehicle used by optometrists and DOs for dispensing of spectacles
  • Optical training of opticians and supervised persons
  • Professional body subscriptions incurred by the practice (only in respect of services received, not goods)
  • Professional indemnity costs incurred by the practice
  • Recruitment costs

Reviewing the calculation

If the method no longer results in a fair and reasonable apportionment the practice must adopt another method. In any event, the apportionment should be recalculated whenever a major change in the optician’s business takes place Examples of what constitutes a major change include:

  • change in the number of branches in the practice
  • Changes in the numbers of optometrists, DOs or directly-supervised persons
  • Restructuring the practice, for example, if an optometrist has previously performed both sight tests and dispensing services now exclusively performs sight tests
  • Changing from buying in lenses to glazing “in-house” (or vice versa)

If an optician is uncertain whether particular circumstances constitute a major change, they should recalculate the taxable percentage at the end of each year and perform an annual adjustment.