VAT & NHS Rebates

The Upper Tribunal has found in favour of HMRC in the case of Boehringer Ingelheim Ltd (BIL), ruling that payments made by the pharmaceutical manufacturer to the Department of Health and Social Care (DHSC) under government pricing schemes do not, in the majority of circumstances, reduce the taxable amount of its VAT supplies. The decision overturns an earlier First-tier Tribunal ruling and carries significant implications for the pharmaceutical sector.

BIL made substantial payments to the DHSC between 2014 and 2020 under two government schemes designed to control NHS expenditure on branded medicines. The company argued that these payments were, in effect, a retrospective price reduction on its supplies - which are primarily made to wholesale distributors at standard rate - and that it was therefore entitled to a corresponding VAT repayment. The First-tier Tribunal had agreed.

The Upper Tribunal found that the FTT had erred in law and remade the decision in HMRC's favour. The central issue was whether a sufficiently direct link existed between the payments made to the DHSC and the specific supplies of medicines.

The legal framework draws on EU-derived principles permitting a reduction in the taxable amount where a price is reduced after a supply has taken place. European case law - including earlier Boehringer CJEU decisions - established that rebates paid to a third party can reduce the taxable amount where that third party qualifies as the final consumer of the supply.

The Upper Tribunal found that, for the vast majority of BIL's supplies made through wholesalers to pharmacies and hospitals, the DHSC was not the final consumer. The payments under both schemes were characterised as contributions to the overall healthcare budget - a mechanism for controlling industry-wide profit levels - rather than as direct discounts attributable to specific product supplies. The link between supply and payment was held to be too remote. 

A narrow exception was acknowledged. Where the DHSC could be shown to be the final consumer - for example, through direct procurement of certain vaccines - a reduction in taxable amount may be available. For the bulk of BIL's indirect supplies, that threshold was not met.

The ruling confirms that payments made under government-mandated pricing and profit control schemes will not automatically be treated as a price reduction for VAT purposes. The determinative question is whether the recipient of the payment can properly be characterised as the final consumer in the supply chain. Where supplies are made indirectly through wholesalers, that characterisation will generally not be available.

For pharmaceutical businesses and their advisers, this decision warrants careful review of how rebate and scheme payments are treated for VAT, particularly where significant sums are involved and indirect supply chains are the norm.

If you would like to discuss the VAT treatment of rebates or pricing scheme payments, VITA can assist.