Upper Tribunal VAT decision in Boehringer Ingelheim

Boehringer Ingelheim supplied medicines directly to NHS healthcare providers and retail pharmacies and indirectly through wholesalers. All their supplies were standard-rated.

The medicines could then be used in NHS hospitals as part of free healthcare services or dispensed for home use under arrangements where the supply to the end user was zero-rated.

Boehringer Ingelheim made payments to the Department of Health and Social Care (DHSC) under two voluntary pharmaceutical pricing schemes. It argued that the Department was the economic final consumer because it funded the NHS and bore the ultimate cost of the medicines. As a result, it considered that the payments reduced the consideration received for its supplies, with the result that it was entitled to adjust its output VAT. It made a claim for overpaid VAT of approximately £21.5 million for the period from 1 April 2014 to 30 September 2020, together with further amounts for later periods.

The First-tier Tribunal accepted the company’s argument, but HMRC appealed to the Upper Tier Tribunal.

What did the Upper Tier Tribunal decide?

A post-supply payment or rebate may reduce the taxable amount where it represents a genuine reduction in the consideration for an earlier supply. However, this is only appropriate where there is a sufficiently direct link between the payment and that supply.

The Upper Tribunal concluded that the DHSC could not generally be treated as the final consumer simply because it funded the NHS. This was because it was too far removed from the relevant supplies and just because an organisation ultimately bears an economic cost, that does not, by itself, make that organisation the final consumer for VAT purposes.

As a result, the Upper Tribunal allowed HMRC’s appeal so that the vast majority of the claim was dismissed

However, the court did concede that there are some circumstances where an output VAT adjustment can be made. An example would be where the DHSC paid for and received medicines, as this created the necessary relationship between the supply and the rebate. It was noted that this could be applied to supplies of vaccines.

The Upper Tribunal also highlighted that there can be no adjustment where the final supply in the chain is zero-rated, as this would create an “absolute and impermissible tax loss”.

Boehringer Ingelheim has been granted permission to have its case heard by the Court of Appeal, and this point creates a separate obstacle if it is accepted that a reduction in output tax is allowed because of the amounts paid by it under the pharmaceutical pricing schemes.

Implications for businesses

There are clearly direct consequences for any businesses that make payments under the pharmaceutical pricing schemes, and they should consider their position in light of this decision.  However, rebates are a common mechanism in supply chains both with and outside the government, so any businesses that are involved in such payments should review the contractual and physical supply chain to ensure that VAT is being accounted for correctly.

For further information on the above, please get in touch with your usual Crowe UK contact.