The Advantages of Using Stock Modules to improve VAT position
Principal, Eros Business Consulting
Many practitioners see the use of a stock module as an additional luxury which adds time with little benefit to the practice. This is because they have never been shown how stock knowledge can increase profitability, help with promotions, ensure gross profitability levels are retained or maximised and even improve your VAT apportionment agreement or reduce sales tax payments. There are two business briefings that will demonstrate the advantages of stock control. In this we will discuss how better stock information and stock history can assist in an improved vat position.
You can read a second briefing on how a stock module can improve profitability and increase footfall.
This briefing concerns improving your VAT attribution.
VAT and the cost apportionment treatment of spectacles and contact lenses puts stock history and control in centre stage.
Practices appear to be running with three or four types of apportionment agreements.
Those with recently agreed percentages with HMRC have calculated the average cost of frames and lenses (net cost price) and after applying VAT have apportioned the sum of these against the cost of providing the dispensing service. Without a stock module showing stock sales history, calculating the actual cost of frame sold can be very time consuming. (This is well known to the writer who has had to spend a great deal of time ferreting out this information when not available for clients.)
There are other ways of finding out frame prices. One method is to average the purchasing costs over a year but these provide false figures with higher cost prices of frames than the actual sale generally because lower cost items are sold more often in a practice. You also need to find out how many frames were dispensed and how many dispensings were lens only which is also time consuming, but a very useful KPI when measuring dispensing activity.
Having this information is invaluable for the business as we will discuss later, but it’s a must when agreeing a Full Cost Apportionment agreement with HMRC which can save £1000’s each year of net profit in a profitable business. (Many of the writer’s clients have saved in excess of £6000 per year in overpaid VAT and some have been rewarded with an overpaid past payment refund of over £10,000).
There is also a group of practitioners still using old “cost plus” agreements which are in the most part considered no longer valid although we still find the odd renegade officer applying them with usually far too high a percentage.
These agreements, often enforced except in rare occasions need rescinding but if “cost plus” is to remain in use you must have a simple sales reporting system for frames and lenses, and again especially in frames. This is because cost plus asks you to total the net cost of all frames and lenses dispensed in a period and add an artificial percentage which creates an artificial selling price to which in most cases the VAT rate is added (but in rare cases the VAT is regarded as inclusive).
Many practitioners without a stock module basically add up all frame and lens purchases from invoices and apply the cost plus. But of course many of those frame purchases will still be sitting on the frame bars or under the counter and yet VAT will have been attributed on them as a sale even when they remain unsold. Often retrospective discounts are applied later by manufacturers which had they been accounted for within a stock module would have reduced the VAT element.
So it is evident that a stock module for many will provide instant relief in VAT payments, which will continue year on year and easily pay for itself and the small additional work in setting up a stock file, but what else can it do?
In conclusion stock control modules are not a luxury but a vital part of a business’s armoury in ensuring for a profitable business.
Read about better stock control analysis in another PHN Business Briefing now
Bob Hutchinson has been working in the centre of the optical sector since becoming an optometrist in the 70’s.
Recently retiring from clinical optometry, he continues to act for many SMEs as well as larger groups in strategy, PR & marketing and financial advice with a specialism in optical VAT.
His client base also includes large industrial companies in equipment and IT involved in the optical industry to name a few.
Still involved in optical decision making his aim has always been to encourage regulators and negotiators to allow the sector to flourish, and to assist others to own and manage financially robust businesses.
Eros Business Consulting