Managing indirect tax pitfalls for Clinical Research Organisations

Clinical Research Organisations (CROs), also known as Contract Research Organisations, play a crucial role in advancing medical research and drug development. Due to the complex interactions and status of the supporting organisations, navigating the landscape of indirect taxes - such as VAT and customs and excise duties - can be challenging. In this article, we explore some of the key considerations and potential pitfalls for CROs operating in the UK.

VAT implications for CROs

Complex relationships

CROs often engage in intricate supply chains involving many stakeholders, including pharmaceutical companies, contract manufacturers, the NHS, and research institutions. These supply chains may span multiple jurisdictions, making VAT compliance a critical concern.

Direction of travel

Within the sector, it can be common for there to be a range of contracts or tripartite agreements, including those held directly between the NHS and the CRO, with the sponsor, or for a tripartite relationship to exist.

Understanding the direction of a contracted supply is paramount for determining the correct VAT treatment. This can dictate whether VAT should be charged and the VAT recovery status. Any VAT incorrectly charged cannot be reclaimed by the payer.

A leading case law precedent to consider is the Supreme Court ruling in HMRC versus Airtours, and it’s also important to seek consensus among the tripartite participants.

VAT status of the main players

Budgeting and cash flow are key concerns for CROs. Having a good understanding of the VAT status of the main stakeholders is important to ensure there are no surprises that may delay a project or cause a commercial dispute. In board terms, the VAT status can often be summarised as:

VAT treatment of clinical trials

CROs support a range of services, from managing clinical trials to arranging patient data analysis. The VAT treatment of these services depends on factors such as location, recipient, and the nature of the service.

• Clinical trial services can either be standard-rated, exempt or outside the scope of VAT.

UK to UK

• If the primary objective of a contract is the provision of reporting data, HMRC’s view is VAT should be accounted for at the standard rate.
• If the primary objective of a contract is for a qualifying medical provider to treat individual patients, the supply should qualify for VAT exemption.
• The provision of a ‘true’ grant to fund clinical research is outside the scope of VAT.

UK to overseas (B2B)

• The supply should be outside the scope of VAT with the provider’s VAT recovery mirroring that of a UK-UK contract.

• Ancillary services (eg data management and statistical analysis) would usually be subject to VAT.

Reverse charge mechanism

When CROs receive services from non-UK suppliers (eg overseas pharmas), the reverse charge mechanism applies where the service would be subject to VAT if provided by a UK supplier. Under this mechanism, the recipient (CRO) accounts for VAT on the transaction, rather than the supplier.

Customs and excise duties

Importing and exporting goods

CROs often arrange for the import and export of goods (eg medical equipment and investigational drugs) for clinical trials. Key considerations include the below.

• Even though customs duty is often 0% and thus commonly overlooked, customs compliance is still a key requirement, with HMRC actively carrying out customs audits.
• Customs declarations: ensuring goods have been declared correctly by agents and any applicable reliefs are claimed. This requires visibility of declarations made on a CRO’s behalf.
• Customs valuation: most importantly, determining the value of imported goods affects duty liability and is a common area of over-spend. This is a complex area as trial drugs are unlikely to have a market price and supplies may include placebos with nominal value. Even goods provided free of charge need to be valued for customs purposes, and use of arbitrary values can trigger customs audits and result in penalties.
• Customs reliefs: while relief is available for goods imported for testing purposes, there are tracking and reporting requirements and a failure to meet these requirements can result in additional customs duty, import VAT and payable penalties. 

Toll manufacturers

CROs may engage toll manufacturers to produce investigational drugs. In such arrangements, the following applies.

• VAT and customs implications arise when transferring goods between the CRO and the toll manufacturer.
• Proper documentation and understanding of the supply chain are crucial.
• Following recent case law, only the legal owner of goods can reclaim import VAT. The transfer of risk and reward associated with the title of goods impacts VAT and customs treatment. CROs must be clear on ownership and contractual terms to determine when and to whom the title to goods passes.
• If the importer doesn’t own the goods, the use of customs special procedures may be required to prevent irrecoverable import VAT being incurred, ie where a CRO imports API owned by another party. Authorisation from HMRC is required to operate a special procedure.

Conclusion and recommendation

Managing indirect tax pitfalls requires proactive planning, clear communication, and collaboration with tax advisers. 

It is highly advisable for a CRO to map out the tax implications of their supply chain at the earliest stages. Some of the most common pitfalls include confusion created by tripartite arrangements, reclaiming VAT incorrectly charged by other stakeholders, overlooking the self-charge VAT rules, overpaying import and excise duties and understanding who has title to investigational drugs.

It goes without saying that CROs should stay informed about the ever-changing regulatory framework and seek professional guidance to ensure compliance and minimise any tax risks.