A recent tribunal decision has drawn attention to a VAT anomaly that could increase the bottom-line cost for the NHS to deliver healthcare services within prisons. This is despite equal care between community and prison populations being a key government policy (NHS England (2019) The NHS Long Term Plan).
RSM’s client, Spectrum Community Health, is a social enterprise company which holds a contract with the NHS to provide a range of primary health and care to prisoners in thirteen prisons across England. Services include GP checks, nursing, pharmacy, physiotherapy, dentistry, optometry and support to prisoners with substance misuse and mental health problems. Spectrum’s activities under this contract were generally exempt from VAT as medical care, meaning that the company was not registered for VAT and could not recover VAT on its associated costs.
A dispute arose with HMRC over the correct VAT position of prescription drugs and sexual health products distributed by the prison pharmacies run by Spectrum. When supplied in their own right, for example in a high street pharmacy, prescription drugs are zero-rated for VAT purposes, while sexual health products, such as condoms, are usually subject to the reduced VAT rate of 5%. Spectrum contended its distribution of these goods in prisons was a separate and distinct supply from its other medical services and was taxable for VAT purposes. Given the value of these supplies alone exceeds the VAT registration threshold, this would have meant that Spectrum should be registered for VAT. While that would require it to charge the NHS VAT at 5% on the sexual health products (although not on the zero-rated prescription drugs), it would also entitle Spectrum to recover VAT on the costs of providing those goods through its pharmacies.
However, the First-tier Tax Tribunal has found in favour of HMRC, deciding that Spectrum had, overall, made a single supply of an integrated healthcare service in the prisons, and the prescription drugs and sexual health products were only a part of this. The tribunal thought it would be artificial to apportion the supply into the individual elements for VAT purposes because they all share the same aim - of enabling a healthcare service to be provided in the prisons equivalent to that available in the general community. Therefore, the contract as a whole was exempt from VAT and Spectrum could not recover VAT on related costs.
This is disappointing outcome for public service providers and their contractors. Had Spectrum been allowed to treat these products as taxable for VAT purposes, the NHS would have been able to recover the 5% VAT Spectrum would be obliged to charge on the sexual health products.
However, where contractors are forced to bear irrecoverable VAT, this usually has the effect of increasing the overall price they charge to the NHS for their services – something the NHS cannot claim back from HMRC. So, despite the contract’s aim of making basic healthcare in prisons as good as that available outside, the decision makes it more expensive for the NHS and its contractors to run a pharmacy service in prisons than for a commercial provider to operate a high street pharmacy.
The case may also have much wider ramifications for other providers commissioned by the NHS where single contracts are treated as payment for two or more services. Amongst others, this could include community pharmacies, patient transport and community equipment providers.