VAT for a healthy supply chain

It also showcased the UK as not only a leader in science but also an attractive place to do business. Companies from around the world, many from the US, have since invested in the UK taking advantage of the cutting-edge expertise on offer and the favourable regime created by the government.

The success of the healthcare, pharma and life sciences industry does, however, rely on a global supply chain and ensuring it works is one of the foundations for a successful business.

Robust VAT arrangements are critical to ensuring a smooth and reliable supply chain as errors can be costly. Mazars UK is currently assisting a client with a reclaim from HMRC of around £1m in underclaimed VAT. This evidences that managing a supply chain effectively reduces risk and has a positive impact on cashflow.

Boost

The UK government sees success in this sector as being strategically important to our economy. In 2021 it set out its “Life Sciences Vision”, a 10-year strategy to build on the successes of Covid-19, which included a £200m investment fund to boost companies and their research. In implementing this strategy, the UK is seen as an attractive destination for investors from around the world either looking to set up here or acquire local operators. Re-joining the EU’s Horizon Science Programme will further solidify the UK as a global leader in medical research.

It is important to note that after Brexit the UK sector is intertwined with a continental supply chain that requires knowledge of VAT arrangements for moving equipment and essential pharmaceutical compounds out of the European Union.

Before Brexit this would have been easy, as goods could move freely within the borders of the EU. But the trading relationship with the continent has changed dramatically. VAT is now payable on all goods imported from the EU, as are tariffs, if they are applicable.

Import VAT is likely to be refundable, as long as the goods imported are used for business purposes and with the relevant party being named as importer of record. Ensuring the correct party is named as importer of record is often an area advisors see clients encounter problems with and, whilst it can be resolved, it is not an easy process to rectify. As VAT is charged at 20%, the values involved for a large company can very quickly add up, so it is important to be pro-active in this area.

EORI

The starting place for ensuring VAT arrangements are reliable is applying for an EORI number (“Economic Operator Registration and Identification number”). An EORI is a 17-digit code used by importers to identify themselves to customs authorities on the continent. The number should be included on all customs declarations. The number helps speed up the customs clearance process and cuts the risk of delays, a crucial issue for time-sensitive supply chains.

It’s also essential that companies importing supplies register for UK VAT. The import of most goods for this sector will attract import VAT, which will then need to be assessed for VAT recovery. Customs duties also need to be considered and depend on classification of the goods in tariff schedules and valuation through prescribed methods. Classification and valuation can require guidance from an expert to negotiate and its complexity should not be underestimated.

Title and Contracts

Things can go wrong, when it comes to VAT, if there is any doubt about where “title”, or ownership, rests for the imported goods. This can crop up if there is confusion regarding VAT paperwork. For example, a company might push for delivery of goods and a freight forwarder transports them using their own name. To HMRC this then looks as if the freight forwarder has the title, leaving the actual owners unable to recover the import VAT incurred.

In another example, particularly seen by large organisations, there may be confusion over title between a parent company from overseas and a UK subsidiary. Confusing these might have the same result of making recovery of VAT very difficult.

Mistakes are easily made and often, in the rush to capitalise on exciting new innovations, the movement of goods across borders can be viewed only as a commercial transaction instead of a critical tax issue. 

Errors generally occur when detail is overlooked, particularly if the import contracts fail to properly reflect the “title” relationships between importer, freight forwarders and suppliers—sometimes multiple suppliers—in the supply chain. Title may, in fact, pass between suppliers as each applies their process to a compound or medicine, in turn, before moving it on to its final owner. Unpicking who has the real title to imported goods with vague paperwork and after the event is much harder than simply having it all in order up front. Reliable paperwork is also essential because, should things go wrong, contracts become the key piece of evidence to place before HMRC.

Often, the importance of drawing up these contracts correctly can be lost in the zeal to deliver health enhancing treatments and pursue commercial opportunities. It becomes a last-minute task to be done long after all the work of developing a product, sourcing suppliers and making the orders. Leaving this until last minute can run the risk of undoing all the good work of researchers and procurement teams.

It’s worth bearing in mind that failing to properly register for VAT or filing VAT returns incorrectly is not only a “refund” issue. There are penalties for those that get the paperwork wrong. A sobering thought for life sciences and pharma companies who may have to manage the movement of goods through multiple countries simultaneously before they can finally import supplies to Britain for the finished product.

VAT arrangements and detailed contracts can often be low down a list of priorities when building a supply chain that will, in the end, create products that could save lives. But they play an essential role if all is to go well.