VAT and price rebates

The Upper Tribunal has held that payments made by a manufacturer of medicines to the UK Department of Health and Social Care (DHSC) did not qualify as price reductions of earlier supplies made by that manufacturer to wholesalers and pharmacies: Boehringer Ingelheim Ltd v HMRC [2026] UKUT 135. Whilst the DHSC was economically responsible for ultimately funding the NHS, the ultimate recipient of supplies of the medicines, that was not sufficient for the payments (which operated as a form of price control) to amount to a refund of consideration on the earlier supplies. A price reduction for these purposes required there to be a direct link between the repayment and the consideration for the original supply. In this case, that direct link was lacking to the extent that the original supplies were made to wholesalers and pharmacies rather than directly to the DHSC and the fact that the DHSC was ultimately responsible for funding such supplies was insufficient.

The UT also agreed with HMRC that, to the extent that any medicines were ultimately supplied through the chain to the final consumer as a zero-rated supply, no price reduction could be applied even where the original supply was to the DHSC. This was because to allow a price reduction in such circumstances would breach the principle of fiscal neutrality and lead to an absolute tax loss to the Exchequer.

Background

The case involves another case in the healthcare sector involving refunds by Boehringer Ingelheim Ltd (BIL) for supplies of pharmaceuticals. In particular, BIL supplied medicines to the NHS in the UK which were made either (a) directly to NHS healthcare service providers (HSPs) and pharmacies; (b) indirectly through wholesale distributors. The supplies were standard rated, as were on-sales by wholesalers and pharmacies. Medicines were ultimately used either in a hospital setting (no supply for VAT purposes) or dispensed for a fee (zero-rated supply).

As part of wider arrangements as to the funding of the NHS, BIL made payments to the Department of Health and Social Care (DHSC) under the Voluntary Schemes to limit prices/profits. BIL claimed that these payments were price reductions for the supplies it made and sought to recover overpaid VAT. HMRC rejected that claim on the basis that the payments did not reduce the consideration received by BIL for its supplies. BIL appealed that decision to the FTT successfully and HMRC have now appealed the decision of the FTT to the UT.

UT decision

HMRC argued that the payments made by BIL fell outside the scope of Article 90 of the Principal VAT Directive (PVD). Article 90 provides that “where the price is reduced after the supply takes place, the taxable amount shall be reduced accordingly”. HMRC argued that the payments did not relate to any identifiable supply of medicines but rather operated as a general levy on revenue, akin to a profit regulating mechanism.

The UT agreed with the FTT that just as there must be a direct link between a supply and consideration, there must be a direct link between a price reduction and the consideration for the supply for it to qualify as a price reduction under Article 90. Therefore, the payment must operate as a reduction in the value given as reciprocal performance for the original supplies.

The FTT had held that the DHSC was a final consumer in connection with BIL’s supply of medicines on the basis that the DHSC ultimately bore the cost of those medicines in its role funding the NHS. However, the UT has concluded that there is no justification for a conclusion that the party that bears the cost, in a general sense, is the final consumer of the supply. It was clear from CJEU case law in this context that a final consumer must be identified by reference to a relationship of reciprocal performance.

“It is, in our view, clear that the correct test requires there to be identified a relationship of reciprocal performance where value is provided/payment is made by one party in return for the supply of goods or services by that other, though the goods and services need not be provided physically to the party giving value. This is not a test of some asserted economic reality whether found as a fact, or otherwise. What is required is for there to be a careful assessment of who does what for whom and in return for what value. As the FTT applied a different test we agree with HMRC that it erred in law in that regard.”

In this case, where supplies were made to pharmacies or wholesalers, it was clear that the payments by to the DHSC by BIL could not operate as a price reduction of those earlier supplies. Whilst the UT held that “at the broadest economic level the DHSC “funds” the NHS and the purchase of Medicines; however, we consider that the budget allocation made by the DHSC is too remote to have a direct link to any particular supply of Medicines or to the supply of Medicines generally into final consumption.”

However, where supplies of medicines, in particular vaccines, were made directly to the DHSC, then payments by BIL could operate as price reductions. “DHSC has paid BIL and subsequently BIL pays DHSC an amount referable to the extent to which growth in sales of those identified Medicines exceed the expected rate… the amount of VAT paid at final consumption has been reduced. BIL has received a lower amount for the supplies of these Medicines, having made the relevant part of the Payment that relates to those Medicines to DHSC, and it is entitled to adjust its output tax.” The payments by BIL in this scenario had the effect of reducing the value provided by way of reciprocal performance and that is sufficient to amount to a “price reduction”. It did not matter whether the payments were best described as “price controls”, it is the effect of those payments that mattered.

Zero-rated final supplies

In the alternative, HMRC argued that there is no entitlement to adjust the consideration where the supplies into final consumption are zero rated. This was based on the CJEU decision in Commission v Germany (Case C-427/98). The UT agreed with this analysis on the basis that to allow an output VAT adjustment by the manufacturer in such a supply chain (where the final supply is zero-rated and the final supplier recovers all input VAT) would breach fiscal neutrality and result in an absolute tax loss. Therefore, to the extent that any supplies by BIL to DHSC had been used by DHSC in making zero-rated supplies, no adjustment would be allowed.

Comment

The decision is the latest of many involving repayments by manufacturers of medicines in connection with national price control schemes, several involving Boehringer Ingelheim. These cases were carefully considered by the UT in this case and demonstrate the importance of considering the specific fact pattern and specific contractual arrangements in each case to determine whether the payments amount to a price rebate.