Government faces financial black hole after landmark pharma case

Boehringer submitted a VAT refund claim to HMRC for £21,488,167 covering an initial six-year period. This amount is potentially a drop in the ocean compared to the NHS’s projected £19bn expenditure on medicines each year.

The health system in the UK, similar to many countries, operates a scheme whereby pharmaceutical distributors pay a rebate against their wholesale supply of medicines into the public health system. The UK’s own scheme is the Voluntary Scheme for Branded Medicines Pricing, Access and Growth or ‘VPAG’ and is largely seen to help the state maintain the affordability of branded medicines. In essence, the distributor pays a sum to the Department of Health & Social Care (DHSC) as a proportion of their total sales to NHS hospitals.

The key issue is whether the rebate Boehringer paid to the DHSC effectively reduces their NHS sales income and the output VAT payable. Back in 2019, the Boehringer group won an EU VAT case (Case C-717/19) against the Hungarian authorities based on similar principles. HMRC refused to accept such concepts should apply in the UK and in this case argued the funds paid to the DHSC could not be linked to Boehringer’s sales made to the NHS. HMRC also argued Boehringer would be unjustly enriched or it would breach grounds of fiscal neutrality.

The judge roundly dismissed HMRC’s case, establishing the funds paid to DHSC found their way back to the NHS thus were effectively sale credits. As there is a customer credit, Boehringer must also be entitled to a ‘VAT credit’. For HMRC to refuse a VAT credit, arguably, HMRC would be the ones unjustly enriched by taking more tax than the actual end sale price.

So this appears an equitable result for the pharma sector and the lesson learnt is HMRC should have accepted the principles of the 2019 decision. But with approximately £14bn of branded medicine rebates paid to the DHSC over five years, the total VAT repayable by HMRC to medicine distributors could amount to a huge £2.5bn.

The significant sums involved may mean HMRC appeal this case. They may have limited grounds to do so and serious questions should be asked regarding how it will all be funded if such an appeal fails. Perhaps another tax rise will be needed on non-working people?

For further information please contact Scott Harwood, VAT and Indirect Tax Partner
scott.harwood@rsmuk.com