VAT on payments to the NHS by pharmaceutical companies

Who this will interest: pharmaceutical companies selling to the UK’s National Health Service and making payments to a price regulation scheme.

Key point(s): The Upper Tribunal has mostly ruled in favour of the UK tax authorities (HMRC) and considered most of the payments to a price regulation scheme do not qualify as rebates for VAT purposes.

Essentia’s take: This is a surprising decision as the First Tier Tribunal had ruled in favour of the tax payer. The decision will likely be appealed.

Action points: Even though the decision is in HMRC’s favour, pharmaceutical businesses potentially impacted by the decision in this case may still consider filing a refund claim instead of waiting for a final decision, otherwise the amount potentially owed to them will gradually decrease.

In detail

The Upper Tribunal has published its decision in the HMRC_v_Boehringer Ingelheim case.

Boehringer Ingelheim Ltd (BOEHRINGER) is a business that sells pharmaceutical products to the UK’s National Health Service (NHS) either directly or indirectly via wholesale distributors. All sales are subject to UK VAT.

In the period 1 April 2014 – 30 September 2020, there were two voluntary price control  schemes operated by the Department of Health and Social Care (DHSC) that were meant to limit price and/or profit or to otherwise manage the cost of medicines purchased for and used by the NHS: the Pharmaceutical Price Regulation Scheme and the Voluntary Scheme for Branded Medicines Pricing and Access.

Boehringer made substantial payments to these two schemes as it had sold medicine to the NHS. Boehringer therefore considered that these payments represented a price rebate to the initial sales made to the NHS and they should reduce the VAT that it accounted for on the initial supplies.

Five retrospective claims to recover VAT were made for periods starting 1 April 2014 to 30 September 2020 for a total overpayment of VAT of nearly £21.5 million. The claims were rejected by the UK Tax Authority (HMRC). Boehringer took the matter to court and the First Tier Tribunal decided in their favour. HMRC appealed the decision and the Upper Tribunal has now published its judgement.

We note that further claims were submitted for the following periods as well, but the appeals are stayed pending the outcome of this case.

The decision of the Court

The Upper Tribunal (UT) decided in favour of HMRC this time. The UT agreed with the First Tier Tribunal (FTT) that in order for the payments to be discounts there must be a direct link between them and consideration given for the supply. However, they considered the FTT had applied the wrong test when determining if the DHSC was a final consumer.

The UT’s review splits the supplies of medicine in three categories:

• Supplies of medicine to NHS hospitals;
• Supplies to pharmacies who then supply consumers;
• Those directly supplied to the DHSC;

The UT considers only the last category to meet the condition of a direct link being established between the payments and the supply of medicine.

For the other categories the UT considered the DHSC is not the final consumer. Instead it distinguishes between the DHSC and the NHS with the two being at arm’s length, although the DHSC does provide the funding for the NHS.

The decision is very technical and reviews extensive case law on the matter, however, the main issue identified by the UT seems to be that direct link between the supplies of medicine and the payments to the DHSC schemes cannot be established because the DSHC is not in fact the consumer.

It is likely the decision of the UT will be appealed and the case may be reviewed by the Court of Appeal next assuming permission for an appeal is given.

Impact for businesses in the pharmaceutical sector

The decision in this case will impact not just Boehringer, but also other companies selling to the NHS and making payments into price regulation schemes. If the payments into those schemes are deemed to be rebates then other pharmaceutical companies will have also overpaid VAT and become entitled to a refund.

Some pharmaceutical businesses have already submitted refund claims after the initial decision of the FTT was published, which will be reviewed once the case has been finalised.

It is likely the case will be reviewed by the Court of Appeal and, judging by the complexity of the matter, it is possible the case may eventually end up with the Supreme Court. However, the statute of limitation for VAT purposes in the UK is four years, meaning that VAT refunds to tax payers cannot be request outside of this period.

Even though the decision is in HMRC’s favour, businesses potentially impacted by this decision should act now and file a claim instead of waiting for a final decision, otherwise the amount potentially owed to them will gradually decrease.

If you would like to know more about this decision, please reach out to us.