V16.833 Drugs, medicines and aids for the handicapped—liability with effect from 1 January 1998
VAT Information Sheet 6/97, December 1997
This information sheet explains the effect of the VAT (Drugs, Medicines and Aids for the Handicapped) Order, SI 1997/2744. It is particularly relevant to hospitals, nursing homes, chemists and suppliers of drugs, medical and surgical appliances and aids for the handicapped. The Order is effective from 1 January 1998.
Private hospitals and residential and nursing homes make VAT exempt supplies of care. This means that they do not charge VAT to their in-patients and residents and correspondingly are not entitled to recover any VAT on related purchases. NHS hospitals are in a similar position, but they are funded by Government to take account of this non-recoverable VAT. Healthcare is therefore VAT free to the patient.
Both private and NHS hospitals and institutions have been involved in schemes to enable them to either recover VAT on purchases or to avoid the payment of VAT altogether. Two court decisions—Mölnlycke Ltd v C & E Comrs (1996) VAT Decision 14641 unreported (Part V12) in December 1996 and BUPA Wellington and St Martin's Hospitals  STC 445 (Part V10) in July 1997—widened the available reliefs and caused an adverse effect on the public purse.
Press Notice No 22/97 [Division V16.3] was issued on 13 August 1997 following the House of Lords decision in BUPA, Wellington and St Martin's Hospitals. In it the Government announced its intention to bring forward legislation to clarify current law in relation to