An NHS Trust claimed it was not liable for VAT on hospital car parking charges, arguing it acted as a public authority under a special legal regime. The Supreme Court held that mere guidance and public law duties to follow it did not constitute a special legal regime, and allowed HMRC’s appeal.
Background
Northumbria Healthcare NHS Foundation Trust (‘the Trust’), an NHS Foundation Trust operating 14 hospitals and several community healthcare facilities in north-east England, provided car parking to visitors, patients, and staff at its hospital sites. The Trust charged for car parking in accordance with guidance issued by the Department of Health and the NHS, including the ‘2015 Parking Principles’ and the ‘Health Technical Memorandum 07-03’. The Trust claimed repayment of £267,443 in VAT it had accounted to HMRC for on car parking supplies during the periods May 2013 to March 2016, contending that it was not a taxable person for VAT purposes when supplying those services. Up to 70 similar appeals by NHS bodies were stayed behind this case, with total tax at stake of up to £100 million.
The Trust’s claim rested on article 13(1) of the Principal VAT Directive (Council Directive 2006/112/EC), implemented domestically by section 41A of the Value Added Tax Act 1994, which provides that bodies governed by public law are not regarded as taxable persons in respect of activities in which they engage ‘as public authorities’, unless treating them as non-taxable would lead to ‘significant distortions of competition’. Two conditions therefore had to be satisfied: first, that the Trust was acting under a ‘special legal regime’ applicable to it as a public authority; and second, that non-taxation would not lead to significant distortions of competition.
The First-tier Tribunal and Upper Tribunal both rejected the Trust’s case. The Court of Appeal reversed those decisions, holding that external guidance combined with a public law duty to adhere to it constituted a special legal regime, and that HMRC had failed to prove significant distortions of competition.
The Issues
The Supreme Court identified four grounds of appeal:
Ground 1: The objective of article 13(1)
Whether the Court of Appeal erred in identifying the objective of article 13(1) as a broad public interest one of allowing public authorities flexibility to retain more revenue for public services or to contain costs for users.
Ground 2: The ‘closely linked’ concept
Whether and to what extent the concept of activities being ‘closely linked’ to the exercise of public authority powers was relevant to the test for acting as a public authority.
Ground 3: Special legal regime
Whether external guidance, combined with a public law duty of adherence, could constitute a ‘special legal regime’ sufficient to satisfy the first condition in article 13(1).
Ground 4: Significant distortions of competition
Whether the existence of actual competition, combined with the principle from Rank Group plc v Revenue and Customs Commissioners, was sufficient for HMRC to discharge its burden of proving significant distortions of competition.
The Court’s Reasoning
Purpose of article 13(1)
The Supreme Court, in a unanimous judgment delivered by Lord Hodge and Lady Simler, firmly rejected the Court of Appeal’s identification of the purpose of article 13(1). The Court of Appeal had concluded that:
subject to the provisos in the second and third subparagraphs … the objective must be the broad public interest one of allowing public authorities flexibility in the exercise of their public functions to choose either to use more of the revenue generated for public services than they otherwise could, or to contain the cost of the service in question for its users.
The Supreme Court held there was nothing in the language of article 13, its context, the legislative history, travaux préparatoires, recitals, or CJEU authority to support such a purpose. Rather, the purpose was a limited exception from the general principle that economic activities are subject to VAT, covering activities performed under a public law regime — the premise being that such activities are generally carried on exclusively or almost exclusively by the public sector.
Special legal regime (Ground 3 — determinative)
This was the central issue. The Court of Appeal had held that the 2015 Parking Principles, issued on behalf of the Secretary of State, combined with the Trust’s public law duty to adhere to that guidance, constituted a special legal regime. The Supreme Court disagreed.
Drawing on established CJEU jurisprudence, particularly Carpaneto 1 and Fazenda, the Court held that a public body acts ‘as a public authority’ when the activity is carried out under a special legal regime — meaning national law conditions that require the body to carry out the specific activity in a way that does not apply to private traders, or the body uses specific public powers. What ultimately matters is the legal way in which the activity is carried out.
Crucially, the Court held that guidance — even externally imposed guidance — does not impose legal obligations with the quality of legal certainty fundamental to the VAT system:
Guidance (even when externally imposed) does not impose any legal obligations. It provides a framework within which a public body should ordinarily act. That is insufficient. The flexibility which is a feature of guidance militates against guidance constituting a special legal regime in the VAT context.
The Court further held that the general public law duty to follow guidance could not transform guidance into a condition of national law:
A general public law obligation to follow guidance is not a ‘condition laid down by national law’ for the pursuit of the activity in issue. It is in the nature of a public authority that its activities will be governed to a greater or lesser extent by both public law and private law, and ordinary principles of public law will apply to any body governed by public law.
The Court rejected the distinction the Court of Appeal drew between internal and external guidance, finding no principled basis for it. Both are subject to the same public law duty of adherence. Accepting the Trust’s argument would mean that a public body or its overseer could effectively write its own VAT treatment simply by producing guidance — fundamentally contrary to legal certainty:
The consequence of the Court of Appeal judgment in this case is that a public body (or its non-legislative overseer) could write its VAT treatment simply by producing guidance to govern or materially affect the way in which the relevant activity is carried out. Such an outcome is contrary to legal certainty and amounts to a taxpayer, not the legislature, writing its own tax treatment.
The Court also observed that the Trust’s approach would impermissibly circumvent article 132(1)(b) of the PVD, under which the Trust had already failed to qualify for exemption for ‘closely related activities’ to hospital and medical care.
Significant distortions of competition (Ground 4)
Although not strictly necessary given its conclusion on Ground 3, the Court addressed this issue fully given the many stayed appeals. The Court held the FTT’s analysis was sufficient and correct.
The Court set out the applicable principles from CJEU case law, including that ‘significant’ means ‘more than negligible’; the assessment must be by reference to the activity as such at a high level of abstraction rather than by reference to any particular local market; and competition includes both actual and potential competition provided it is real and not purely hypothetical.
The Court held there was no requirement for detailed market analysis in every case. The FTT had found actual competition between the Trust’s car parks and private operators, and that differential VAT treatment would as a matter of logic distort competition. The Court agreed with the UT’s reasoning:
the disadvantage flows from the fact of the differential treatment of identical or similar activities meeting the same needs. That disadvantage cannot be excluded where the public body chooses to maintain its pricing but retain a higher profit from that.
The Court rejected the Court of Appeal’s reasoning that retaining income for NHS purposes could not have a distortive effect, calling this a non sequitur linked to its erroneous ‘purpose’ analysis. As the Court explained, the identity of the supplier is irrelevant, and it is unnecessary to examine what is actually done with the VAT saving to establish a more than negligible distortion of competition.
Practical Significance
This decision is of considerable importance, affecting up to 70 similar appeals by NHS bodies involving up to £100 million in VAT. It establishes that mere guidance – whether internal or external – combined with general public law duties of adherence, cannot constitute a ‘special legal regime’ for the purposes of the public authority derogation in article 13(1) of the PVD. What is required is a legal obligation in national law with the quality of legal certainty, such as primary, secondary, or tertiary legislation having the force of law, that governs or materially affects the way the activity must be carried out.
The decision also clarifies that proving significant distortion of competition does not necessarily require detailed market or competition analysis. Where supplies are in actual competition and are similar from the consumer’s perspective, the differential VAT treatment will as a general rule give rise to a more than negligible distortion of competition, which the public body may seek to rebut with evidence.
Verdict: The Supreme Court unanimously allowed HMRC’s appeal on Ground 3, holding that the Trust was not acting under a special legal regime when providing car parking services and therefore did not qualify for non-taxable status under article 13(1) of the PVD. The Court stated it would also have allowed the appeal on Ground 4 (significant distortions of competition). The decisions of the First-tier Tribunal and Upper Tribunal (dismissing the Trust’s claim) were thereby restored.
