Revenue eBrief No. 36/2006
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15th October 2006
Opticians and VAT
Since 1 November 1989 Revenue has treated the supply of corrective spectacles and contact lenses by an optician as a single supply of goods. Opticians were required to account for VAT at the standard rate on the full consideration received for the supply.
Following a decision by the Appeal Commissioner, Revenue accepts that the supply by an optician of corrective spectacles and contact lenses constitutes two supplies, namely:
- A taxable supply of goods, and
- An exempt supply of professional services of an optical nature referred to as "dispensing services".
This decision gives rise to an entitlement to repayment of VAT to opticians where they had accounted for VAT at the standard rate on the dispensing service element of the price.
This article sets out the requirements an optician needs to comply with in order to obtain repayments of VAT, and shows how to calculate the amounts of these repayments where:
- No dispensing charge was identified to the customer or in the accounting records;
- A percentage-based dispensing charge was identified in the accounting records, and
- A dispensing charge greater than 50 per cent was identified in the accounting records.
All claims to repayment of VAT must be supported by an explanation of the circumstances in which the claim has arisen together with comprehensive computations of the make up of each claim.
It should be noted that any claims to repayment of VAT arising from the Appeal Commissioner's decision are restricted to claims received within the statutory time limits, which provide that repayment claims must be made within a specified period of years from the end of the taxable period to which the claim relates. The statutory time limits are as follows:
- In the case of claims relating to taxable periods ending before 1 May 1998 - 10 years where the claim is made before 1 May 1999 and 6 years where the claim is made in the period from 1 May 1999 to 31 December 2004. Claims made on or after 1 January 2005 in respect of such taxable periods are statute barred.
- In the case of claims relating to taxable periods ending on or after 1 May 1998 and before 1 May 2003 - 6 years where the claim is made before 1 January 2005 and 4 years where the claim is made on or after 1 January 2005.
- In the case of claims relating to taxable periods ending on or after 1 May 2003 - 4 years.
Revenue will treat a letter from the optician, which notified Revenue of an intention to make a claim in respect of any specified period(s), as being the receipt of a claim for that period (or claims for those periods) and any subsequent period up to and including the VAT period ending 31 August 2006, subject to full details of the claim(s) now being provided.
No dispensing charge was identified
Where opticians did not charge separately for their dispensing services or did not identify the amount charged for dispensing services at point of sale or in their accounting records, Revenue is prepared to accept repayment claims calculated by the use of the methodology for identifying the tax overpaid on the dispensing services set out below:
Identify the amount of output VAT charged in the relevant period. This is the T1 figure on the VAT returns.
Reduce the T1 figure on the VAT 3 submitted for the period by the aggregate of the following:
- VAT accounted for on intra-Community acquisitions, received Fourth Schedule services, VAT-free imported parcels and other VAT self-accounted for in accordance with VAT law.
- VAT accounted for on Department of Social and Family Affairs and the General Medical Services Payments Board receipts
- VAT accounted for on supplies of goods, other than prescription spectacles and contact lenses, e.g. accessories such as cases and chains for spectacles, cleansing solutions, non-prescription glasses (ready readers), sunglasses, etc
- VAT accounted for on repairs to spectacles.
- VAT on repeat/replacement contact lenses where no "dispensing service" was provided.
Opticians may treat 50% of the output VAT (T1) figure, reduced in accordance with step 2 above, as representing tax incorrectly paid on the exempt dispensing service.
Revenue will treat this 50% figure as taking full account of any restriction of input credit or any additional income tax or corporation tax liabilities that might otherwise arise as a result of the repayment of VAT.
Period January to December 2002
VAT on ICA etc €5,000
VAT on DSFA and GMSPB receipts €10,500
VAT on supplies of other goods €1,500
VAT on repairs €1,000
VAT on repeat/replacement contact lenses €500
VAT overpaid - 50% of difference €15,750
Opticians who have already submitted claims to repayment for prior periods using a different methodology should now revise their claims.
A percentage based dispensing charge was indentified
Following the decision by the Appeal Commissioner some opticians have treated a percentage (usually 50%) of the receipts from the sale of corrective spectacles and contact lenses as being appropriate to the exempt "dispensing service" without disclosing the amount charged for the "dispensing services" to the customer at point of sale. Where this has occurred, Revenue is prepared to agree the VAT liability of opticians including claims to repayment that were or are computed on the following basis:
- Eye testing fees are exempt from VAT. Such fees should be separately identified.
- Amounts charged for ancillary items such as cases and chains for spectacles, coloured lenses, cleansing solutions, etc, and for supplies of non-prescription sunglasses, should be accounted for at the appropriate VAT rate and separately identified. Similarly, amounts charged for repeat/replacement contact lenses, and for repairs to spectacles, where no "dispensing service" is provided should be accounted for at the appropriate VAT rate and separately identified.
- Where the purchase of spectacles or contact lenses was or is entirely funded by payments from the Department of Social and Family Affairs (DSFA), or covered for medical-card holders by the General Medical Services Payments Board (GMSPB), only the dispensing fee agreed between these bodies and the opticians' professional bodies should be treated as exempt from VAT. The balance of the payment made is liable at 21 per cent (however, see (e) below).
- The aggregate of income within (a) to (c) above should be deducted from the gross income from sales in the VAT period. The balance may then be split on a 50 / 50 basis as representing the exempt dispensing service and the taxable supply of goods, and VAT should to be accounted for accordingly.
- Where an individual customer supplements the DSFA or GMSPB allowance/benefit, as the case may be, the 50% spilt referred to in (d) above may be applied only in relation to the amount paid by that customer that is in excess of the DSFA or GMSPB allowance/benefit, as the case may be. The portion of the price represented by the DSFA or GMSPB allowance/benefit must be accounted for as set out in (c) above.
- Opticians may recover VAT incurred on the purchase by them of goods for resale. However, to take account of the exemption of the amounts treated as "dispensing fees", there is no entitlement to recover VAT incurred directly in connection with dispensing services. In addition, there must be a commensurate reduction in the amount of credits due to opticians in respect of 'dual-use inputs', i.e. VAT incurred in the provision of both taxable and exempt supplies.
Opticians who have already submitted VAT returns including claims to repayment for prior periods using a different methodology should now revise their returns.
A dispensing charge greater than 50 per cent has been identified
Some opticians may have chosen to calculate the exempt amount in respect of "dispensing services" other than by using the methods set out above. The optician will in this case be required to prove, by reference to accounts kept, pricing of spectacles and contact lenses, receipts issued and similar documentation, the amount charged in respect of any dispensing fee for each sale.
Any optician who does not choose to use the methods set out above may not rely on any of the calculations contained therein as the basis for claiming a higher percentage for the exempt part of any apportionment.
Position with effect from the commencement of Section 97 Finance Act 2006 (replacement for "Package Rule").
It is anticipated that section 97 of the Finance Act 2006 which amends section 11(3) of the VAT Act will be commenced with effect from 1 November 2006. Under the new legislation the supply of spectacles and contact lenses together with dispensing services will come within the definition of a "composite supply", in which the principal supply will be the supply of spectacles or contact lenses and the ancillary supply will be the dispensing service. In accordance with section 11(3) of the VAT Act, the rate of VAT on the full consideration for that composite supply will be the standard rate.
Interest may be payable by Revenue on the amounts repayable in accordance with section 21A of the Value-Added Tax Act 1972 (as amended).
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