There was an issue reported recently about private sector pharmacies within hospitals. A typical report is .
It appears that NHS hospitals are being encouraged to set up private pharmacies rather than NHS ones because they can save VAT.
On examination this seems to be because the VAT system isn’t being applied properly to the NHS, rather than because the private sector is getting any breaks.
Essentially, the issue is that if a hospital dispenses prescription drugs, that is deemed as a “non-business” supply, so the VAT on the cost of the drugs (and other costs) is not recoverable. Generally, you can only recover VAT on costs which are incurred in the course of making VATable supplies in the course of a business.
However, if a private-sector pharmacy does exactly the same thing in exactly the same place, it does count as a business so it can recover the VAT. Technically, although simply selling drugs is subject to VAT at the standard rate, dispensing prescription drugs to individual patients for consumption off the premises is a zero-rated supply. The pharmacy is therefore making a VATable supply, albeit one where the amount of VAT due is zero. As it’s making VATable supplies in the course of a business, it can recover the VAT.
This has been portrayed as a loophole which unfairly advantages private sector pharmacies. The mischief is partly that this is letting the private sector profit out of the NHS, and partly that decisions about care should be made on medical grounds rather than economic ones.
But surely to call it a loophole being exploited by the private sector is the wrong analysis. The private pharmacies are acting exactly like any other private business; it’s the NHS that is odd, by suffering VAT that it really shouldn’t.
The only difference between an NHS pharmacy and a private one is that the NHS one is part of a larger organisation which isn’t generally in business, and so the VAT becomes irrecoverable. The private pharmacy is unquestionably in business; the difference in VAT treatment is solely due to the fact that the NHS one isn’t.
But surely if it’s doing exactly the same things as a private pharmacy then it must be in business? I know that intention and profit-seeking motive must be taken into account when looking at whether something is a business or not, but is it not appropriate to look at an activity in isolation?
The NHS as a whole doesn’t charge, and so is clearly not in business. But the pharmacy does – and so surely should be treated as if it is in business.
So this story isn’t really about private pharmacies getting an unfair advantage. It’s really that the NHS is treated anomalously for VAT purposes, and this has a potential impact on services to patients.
An easy answer (to the VAT side at least) would just be to allow NHS trusts to set up trading subsidiaries, in the way that charities do. The subsidiary would be treated as a normal business for VAT and other tax purposes, and the trust would benefit from the profits. That would leave all the control of the pharmacy with the NHS, and no profits would leak out into the outside world.