Beynon and Partners v Commissioners of Customs and Excise

JurisdictionUK Non-devolved
JudgeLORD NICHOLLS OF BIRKENHEAD,LORD SCOTT OF FOSCOTE,LORD HOFFMANN,LORD WALKER OF GESTINGTHORPE,LORD STEYN
Judgment Date25 November 2004
Neutral Citation[2004] UKHL 53
CourtHouse of Lords
Date25 November 2004

[2004] UKHL 53

HOUSE OF LORDS

The Appellate Committee comprised:

Lord Nicholls of Birkenhead

Lord Steyn

Lord Hoffmann

Lord Scott of Foscote

Lord Walker of Gestingthorpe

Beynon and Partners
(Respondents)
and
Her Majesty's Commissioners of Customs & Excise
(Appellants)
LORD NICHOLLS OF BIRKENHEAD

My Lords,

1

I have had the advantage of reading in draft the speech of my noble and learned friend Lord Hoffmann. For the reasons he gives, with which I agree, I would allow this appeal.

LORD STEYN

My Lords,

2

I have had the advantage of reading the opinion of my noble and learned friend Lord Hoffmann. I agree with it. I would also allow the appeal and restore the decision of the tribunal and Collins J.

LORD HOFFMANN

My Lords,

3

The issue in this appeal is whether the personal administration of a drug such as a vaccine by a NHS doctor to a patient is a taxable supply for the purposes of value added tax. The European Sixth Directive (77/388/EEC) requires that the provision of medical care in the exercise of the medical and paramedical professions should be exempt from VAT: see article 13 A 1(c). On the other hand, the supply of goods (defined in article 5. 1 as "the transfer of the right to dispose of tangible property as owner") is taxable. The question is therefore whether the doctor is making a single supply of medical services to which the provision of the drug is merely ancillary or whether he is also supplying goods when, for example, the injected drug passes through the needle into the patient's arm.

4

The Commissioners of Customs and Excise take the view that there is a single exempt supply. The consequence is that the doctor is not entitled to deduct or seek repayment of the input tax which was paid on the supply of the drugs to him. That is the normal position of a supplier of exempt services. He is treated as if he was a consumer and bears the burden of the whole of the VAT which has been paid when he receives supplies of goods or services for the purposes of his business or profession. His expenses on VAT, like his other expenses, are matters which he must take into account when deciding what to charge his customers.

5

A doctor in the NHS cannot of course include an allowance for VAT in what he charges his patients because he cannot charge at all. Instead, he must recover his expenses, one way or another, from the NHS. The great majority of doctors do not register for VAT at all. The services they provide are not taxable and the VAT charged on their purchases is not recoverable. In the case of drugs which a doctor buys for use in his practice, the NHS refunds him an amount calculated according to a formula which includes an allowance for VAT: see paragraph 44. 2 of the Statement of Fees and Allowances ("the Red Book") made pursuant to Regulation 34 of the National Health Service (General Medical Services) Regulations 1992 (SI 1992/635) ("the General Regulations").

6

There is however a small minority of doctors who do register for VAT because they are, exceptionally, permitted to dispense drugs as well as administer them. This requires some explanation. In principle, doctors prescribe drugs and registered pharmacists dispense them. By section 43 of the National Health Service Act 1977, the NHS is ordinarily prohibited from making arrangements for doctors to supply "pharmaceutical services", which are defined by section 41 as:

"drugs and medicines and listed appliances which are ordered for [the patient] by a medical practitioner in pursuance of his functions in the health service…"

7

This rule is however subject to an exception. The NHS has a duty under section 41 of the 1977 Act to arrange, in accordance with regulations, for the supply to persons in their area of "proper and sufficient" pharmaceutical services. Normally this duty is satisfied by arrangements with pharmacists. But there are some rural areas which do not have pharmacies within easy reach of all residents. The Area Health Authority must therefore make arrangements for doctors to provide such residents with pharmaceutical services.

8

Such arrangements are made under regulation 20 of the National Health Service (Pharmaceutical Services) Regulations 1992 (SI 1992/662) ("the Pharmaceutical Regulations"). This provides that if a patient would have "serious difficulty in obtaining any necessary drugs or appliances from a pharmacy by reason of distance or inadequacy of means of communication" and in certain other circumstances, he may ask that his doctor provide him with pharmaceutical services and the FHSA may make arrangements for the doctor to do so. In such a case, the doctor acts as if he was a pharmacist. He orders the drug by prescription and then he, or someone in his practice, dispenses the drug to the patient.

9

When drugs are dispensed on prescription in the ordinary way by a registered pharmacist, they are zero-rated for VAT: section 30(2) and Group 12, item 1 in Schedule 8 to the Value Added Tax Act 1994. And by item 1A(a), inserted into the Schedule by the VAT (Supply of Pharmaceutical Goods) order (SI 1995/652), the same treatment is accorded to drugs supplied "in accordance with a requirement or authorisation under regulation 20".

10

That means that if the doctor registers for VAT, he will be able to obtain a refund of the input tax paid on the drugs or appliances supplied to him for dispensing to patients under regulation 20. If a doctor does a sufficient turnover in these goods, it becomes worth his while to register and claim back the input tax. The Statement of Fees and Allowances says, in paragraph 44. 4, that practices normally register when they dispense enough drugs under regulation 20 to have to employ a registered pharmacist to do the dispensing. We were told that in England, about 180 medical practices (out of about 4000) are registered for VAT.

11

Where a doctor is registered for VAT, the NHS does not make any allowance for input VAT when it pays him for the drugs which he has dispensed under regulation 20. That is logical, because he is entitled to claim repayment from the Commissioners of Customs and Excise. But the problem which has given rise to these proceedings is that the Department of Health takes the same view about the VAT on drugs which the doctor administers personally. He receives no allowance for VAT because the Department assumes that he will be able to recover it from Customs and Excise. But the Commissioners, as I have said, take a different view. They accept that when a doctor dispenses drugs under regulation 20, he supplies goods exactly as if he were a pharmacist. But they say that when he administers a drug personally, he is not supplying goods. He is supplying an exempt service.

12

The doctors registered for VAT have thus become involved in what appears to be an inter-departmental dispute. But the result is that neither the NHS nor the Commissioners are prepared to refund or make an allowance for VAT paid on personally administered drugs by practices registered for VAT. These proceedings were commenced by way of an appeal from a ruling of the Commissioners to the Manchester VAT Tribunal (JD Demack, Chairman, the Hon Mrs Angela Widdows, JTB Strangward) by a VAT registered medical practice in Beverley. The Tribunal dismissed the appeal. An appeal to the judge (Lawrence Collins J) was unsuccessful [2002] EWHC 518 Ch but the doctors succeeded in the Court of Appeal (Aldous and Chadwick LJJ and Munby J) [2002] EWCA Civ 1870. The Court of Appeal held that injections and so forth were separate supplies of the goods injected and that they were zero-rated. The Commissioners appeal to your Lordships' House.

13

The logical order in which to consider the issues is first to decide whether, in the case of personal administration, there is any supply of goods and then, if there is, to decide whether it is zero-rated or standard-rated. But I propose to reverse this order and consider whether, assuming there to be a supply of goods, it would be zero-rated. I do so because I think that the answer throws some light on the first question. The Tribunal and Lawrence Collins J thought that such a supply of goods would not be zero-rated. To fall within item 1A(a) of Group 12 the drug must be supplied "in accordance with a requirement or authorisation under regulation 20". Like the tribunal and the judge, I find it impossible to see how the personal administration of a drug by a doctor to a patient who happens to be entitled to a supply of drugs under regulation 20 can be described as a supply "in accordance with a requirement or authorisation under regulation 20." The doctor has no need of any authorisation under regulation 20 to give a patient an injection. It is done all the time by doctors who have no authorisation to make any regulation 20 supplies. The doctor would probably have sufficient authority to do simply by virtue of paragraph 12 of the Terms of Service for Doctors in Schedule 2 to the General Regulations:

"a doctor shall render to his patients all necessary and appropriate personal medical services of the type usually provided by general medical practitioners."

14

If, however, this was not enough, regulation 19(b) of the Pharmaceutical Regulations provides that any doctor may:

"provide to a patient any appliance or drug, not being a Scheduled drug, which he personally administers or applies to that patient."

15

Thus the Pharmaceutical Regulations make a clear distinction between the administration of a drug to the patient by the doctor himself and the dispensing to the patient of drugs which the doctor has ordered for him. The former is something which any doctor may do - indeed, must do, if that would be an appropriate personal medical service which it is the doctor's duty to provide under paragraph 12 of his...

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