HM Revenue and Customs is examining hospital trusts’ tax arrangements amid a growing trend to lawfully avoid paying VAT on outpatient drugs, HSJ has learned.
An HSJ investigation has found at least 30 trusts have brought in private firms to run their outpatient dispensaries and identified two foundation trusts which have set up wholly owned subsidiary companies to run the service.
Current tax guidance from HMRC states that if a hospital trust enters into a contract with a third party to operate its dispensary, drugs for outpatients can be exempt from VAT.
Hospitals normally pay VAT at 20 per cent on all medicines. They can make a significant saving if they bring in or set up a private company to run outpatient pharmacies.
Where an existing company has been brought in, the savings can be shared between the new provider and the trust.
Lloydspharmacy is now running 24 hospital outpatient pharmacies, while Boots runs five, HSJ has established. York Teaching Hospital Foundation Trust’s service is run by the company Healthcare at Home.
However, where a foundation trust has set up a subsidiary company itself, the gains are kept entirely in-house. These subsidiary companies do not have to pay corporation tax if they break even, as opposed to making a profit, or if they are set up as mutual traders, trading only with their members. This is the case for those set up by foundation trusts.
South Warwickshire Foundation Trust and University Hospitals Birmingham Foundation Trust are running their outpatient pharmacies through wholly owned subsidiaries.
An HMRC spokesman, responding to an enquiry from HSJ, said: “HMRC is aware that some trusts have been entering into structures that seek to bring third-party pharmacy services on to hospital premises.
“HMRC is currently reviewing the different structures being used.”
South Warwickshire is understood to be saving £250,000 a year on VAT costs. Meanwhile the Royal Liverpool and Broadgreen University Hospitals Trust, which has brought in Lloydspharmacy, is saving a “high six-figure sum” on VAT out of a total outpatient drugs budget of £11m, HSJ has found.
One source in a hospital trust benefiting from such an arrangement said there was a fear that if all trusts stopped paying VAT on outpatient drugs, HMRC would change the rules. They said such a move would be “punitive and arbitrary”.
South Warwickshire chief ececutive Glen Burley told HSJ: “We are duty bound to do whatever we can to maximise the benefits to patients with the resources we have.”
Tax barrister Anne Fairpo, who has advised NHS trusts bringing in independent providers, told HSJ many trusts would be considering using the approach. “This is not tax evasion − trusts are not attempting to defraud the revenue. They are working within the rules in an attempt to maximise budgets for the NHS.”