VAT and public bodies' activities

Car parking charges at hospitals are already an extremely emotive subject, but that hasn’t stopped HMRC seeking to make itself even more unpopular by insisting on VAT being levied on those charges. In Northumbria Healthcare NHS Foundation Trust v HMRC [2024] UKSC 37, HMRC argued that the Trust was not acting as a public authority in providing car parking and, even if it were, not charging VAT would lead to significant distortions of competition so as to take the situation outside s.41A.

The Trust lost its case on both grounds before the FTT and UT, but the Court of Appeal upheld the Trust’s appeal. The Court of Appeal considered that the extensive Parking Principles issued by the Department of Health under the statutory framework of the NHS Act meant that the legal conditions under which the Trust offered car parking differed in material respects from that applicable to private operators. However, the Supreme Court has now overturned that decision. Simply following guidance and acting under a general public law duty of good practice was insufficient to amount to a special legal regime. Moreover, the Supreme Court held that, even if the Trust had been acting under a special legal regime, the FTT had been correct to hold that non-taxation of parking in this case would have lead to significant distortions of competition so as to be excluded from the regime.

Background

Article 13 of the Principal VAT Directive (PVD) and VATA 1994 section 41A provide that a public bodies are acting as public authorities are not treated as a taxable person for VAT purposes . A body is “acting as a public authority” when it acts under a “special legal regime” (SLR). There is an SLR either when the public body is required by law to carry out the activity in a certain way which does not apply to a private operator or when the public authority is using a specific public law power to carry out the activity. Where this exception applies, the public authority is not treated as a taxable person and does not have to charge VAT on the relevant supplies, unless treating the public authority as non-taxable would lead to “significant distortions of competition”.

The NHS Trust in this case argued that the parking it provided at NHS Hospital car parks fell within this principle as was not provided by it as a taxable person. It argued that it was acting under an SLR because there was guidance from the Department of Health regarding its car parking operations, and it was under the general public law obligation to follow such guidance unless there was a good reason not to. Alternatively, the Trust argued that its provision of car parking was closely linked to its functions of providing healthcare.

The FTT and UT rejected the Trust’s arguments, but the Court of Appeal allowed the Trust’s appeal on its first argument. In particular, the Court noted that the Parking Principles started from a quite different point to those of a private operator, requiring NHS Trusts to ensure users can access sites, rather than focussing on revenue maximisation. As such, the provision of car parking by the Trust differed in material respects from car parking provided by private operators.

The Supreme Court has unanimously overturned the decision of the Court of Appeal.

Existence of an SLR

The question when determining whether a public body is acting under an SLR is whether there is a legal obligation that governs or materially affects the way that the activity must be carried out. The Court of Appeal had been wrong to conclude that external guidance, combined with the general public law obligation to adhere to it in the absence of good reason, was sufficient to amount to an SLR. This was because guidance does not impose legal obligations. The existence of a general public law duty to follow guidance does not change this, because a body can still choose not to follow the guidance.

Indeed, the Supreme Court noted that all public bodies are under general good practice obligations, which include the obligation to comply with policies and guidance. If the general obligation to comply with guidance were sufficient to meet the requirement, then all public bodies would automatically satisfy it. This would deprive the requirement of any meaningful effect. As a result, the Supreme Court held that the Court of Appeal had been wrong to identify an SLR based on nothing more than an obligation that every public body has.

Distortions of competition

The Court went on to consider whether the Trust’s treatment as non-taxable would, in any event, lead to significant distortions of competition. The Court noted that the purpose of this condition is to guarantee fiscal neutrality by ensuring that two similar supplies of services are taxed in the same way and that private operators are not placed at a disadvantage because they are taxed when public bodies are not. In this case, the service provided was car parking at or near hospital sites. In particular, it was not parking solely to visit the hospital, and there was no finding that the parking is restricted to hospital users only. Therefore, when considering competition, the comparison would be between hospital car parking and private car parking near the hospital. The FTT concluded that there was actual competition between the Trust’s car parks and parking provided by private operations in or near those areas and that treating the Trust as non-taxable would lead to actual or potential distortion of competition which was more than negligible. Whilst the Court of Appeal acknowledged that the Trust participated in the market and that there was actual competition between its car parks and parking provided by private operators, the Court of Appeal nevertheless concluded that non-taxation of hospital car parking would not distort competition. In particular, the Court of Appeal considered that the FTT was wrong to consider that if the Trust simply took the additional income without lowering its charges, there would still be distortion. Keeping income, as opposed to reducing charges, would not be distortive. The Supreme Court has held that the FTT had been correct.

Here, as a matter of logic and common sense, the two activities were plainly similar from the point of view of the consumer and meet the same needs so as to be in competition. In any event, there was a finding of actual competition, together with substantial unmet demand for car parking. It clearly followed that if the two activities were treated differently for the purposes of VAT, there would be a distortion of competition, since the treatment of one body as non-taxable is likely, by itself, to discourage potential competitors from entering the market.

The NHS Trust argued that the FTT had failed to analyse whether any such competition would be “significant”. The Supreme Court rejected this argument. It was clear from CJEU case law that the assessment whether distortions of competition are significant is by reference to the activity in question and an analysis of the national market. It does not require an assessment of the effect of non-taxation on the pricing or retained profit decisions of the public body. There is no requirement to carry out a detailed analysis of the competitive conditions of the specific local market or markets in which the Trust provides car parking. Whilst noting that it is open to a public body to adduce evidence that there is in fact no distortion of competition in the particular circumstances of a particular case, the analysis conducted by the FTT was an economic assessment with reference to the activity in question and the conclusion was one that the FTT was entitled to reach on the evidence before it.

Comment

The decision is clearly an important one not just in the context of hospital parking (where it is understood that several cases were stood behind this case) but also in the Supreme Court’s analysis of the conditions to be met for a public body’s activities to fall outside the scope of VAT more generally.