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HMRC probes hospitals’ partnerships with private pharmacies

VAT anomaly that sparked spread of private chemists in NHS hospitals faces clampdown

By Susan Cooke | 4 March 2013

“HMRC is currently reviewing the different structures being used” – HMRC spokesman

Tax officials are investigating a loophole that allows the NHS to avoid paying VAT on medicines for out-patients – following disclosures by Exaro.

In December 2011, Exaro revealed how hospitals in the National Health Service are contracting out pharmacy services to private chemists and making huge savings on VAT thanks to an anomaly in tax rules.

HM Revenue & Customs (HMRC) allows chemist outlets to reclaim the VAT paid on many medicines, while NHS pharmacies in hospitals cannot do the same. The tax authority regards dispensing drugs to be part of a hospital’s “non-business activities”, and so not VAT-recoverable.

But independent chemists operating in hospitals are able to reclaim VAT charged on medicines that they supply to hospital out-patients. These savings can be passed on to hospital trusts.

The loophole led to a raft of commercial partnerships between hospitals and independent pharmacies, as NHS trusts clamoured to take advantage of the tax break.

But hospitals agreed to pay management fees running to millions of pounds to the private chemists. High-street names such as Boots, Lloydspharmacy, Sainsbury’s Healthcare and the Co-operative Pharmacy won lucrative contracts.

However, Exaro has learned that HMRC has decided to look into the practice because it could be costing millions of pounds in lost tax revenue. The VAT-saving arrangement being used is legal, and the rules surrounding it were clarified in HMRC guidance in November 2011.

A spokesman said: “HMRC is aware that some trusts have been entering into structures that seek to bring third-party pharmacy services onto hospital premises. HMRC is currently reviewing the different structures being used.”

Asked how long HMRC had been aware of these tax arrangements, the spokesman refused to comment, saying: “That is something that we cannot commit ourselves on. I cannot give you a date for that.”

In September 2011, the Department of Health sent a memo to chief pharmacists throughout the UK that highlighted the increase in partnerships with commercial chains. It said: “NHS trusts are increasingly examining opportunities to contract out for the provision of out-patient dispensing services.”

According to HSJ, also known as the Health Service Journal, Lloydspharmacy runs out-patient pharmacies in 24 hospitals, while Boots has five.

Sainsbury’s had just won its first out-patient pharmacy contract when Exaro broke the story. Since then, it has also signed a deal with Guy’s and St Thomas’ NHS Foundation Trust to run the out-patient pharmacies at its two sites.

The Co-operative Pharmacy had also been awarded its first hospital pharmacy contract when the original story was published. It went on to agree similar contracts to run out-patient pharmacies with two more hospital trusts.

The Heart of England NHS Foundation Trust was seen as a “trailblazer” because it was the first to take advantage of this tax arrangement through its partnership with Alliance Boots, the parent company of Boots, to provide dispensing services at Birmingham Heartlands Hospital.

When the story broke, a spokeswoman for the trust told Exaro: “The trust is able to take advantage of the VAT benefits to deliver these improvements for patients.”

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Exaro News investigates matters of public interest and seeks to uncover the truth.