Revenue and Customs Commissioners v Northumbria Healthcare NHS Foundation Trust
| Jurisdiction | England & Wales |
| Neutral Citation | [2020] EWCA Civ 874 |
| Year | 2020 |
| Court | Court of Appeal (Civil Division) |
[2020] EWCA Civ 874
Lord Justice Lewison, Lord Justice Newey and Lord Justice Baker
Court of Appeal (Civil Division)
Value added tax – Judicial review – Whether leasing of cars to employees under salary sacrifice scheme is de-supplied by Value Added Tax (Treatment of Transactions) Order 1992 (SI 1992/630) – Yes – NHS Trust entitled to claim VAT incurred under VATA 1994, s. 41(3) as it is a contracted out service.
The Court of Appeal confirmed a UT decision that the Trust was entitled to claim VAT incurred on the leasing of cars which were made available to employees under salary sacrifice arrangements. The provision of the cars was not an economic activity because it was de-supplied by SI 1992/630. The Trust was therefore entitled to make a claim for VAT because it was incurred on non-business activities and fell within VATA 1994, s. 41(3).
Although the NHS Trust did engage in some economic activity, this case concerned activities undertaken in the course of its statutory obligation to provide NHS healthcare, which is a non-economic activity.
The Trust leased cars which it made available to its employees under a salary sacrifice arrangement.
The Trust claimed a refund of VAT incurred on car leasing charges under s. 41(3) of VATA which permits government departments (including NHS Trusts) to recover VAT incurred on non-business activities under the Contracted Out Services Direction (COSD).
SI 1992/630, referred to as the “De-Supply Order” in the decision, states that when cars are made available to employees under a salary sacrifice or similar arrangement, this is neither a supply of goods nor services. The Trust argued that, because it was not making a supply, the provision of the cars was a non-business activity and it was therefore entitled to claim VAT incurred on costs under s. 41(3).
HMRC's argument, in essence, was that, although they are related, “supply” and “economic activity” are distinct concepts. The Trust was engaged in economic activity when the cars were provided even though no supply was made and therefore a claim under s. 41(3) was not permitted.
Although the Court agreed that not all supplies are made in the course of an economic activity, it concluded that a supply was a pre-requisite of economic activity, i.e. if there was no supply there was no economic activity (see paras. 27, 31 and 38).
The Court agreed with the UT that, by virtue of the De-Supply Order, the provision of the cars was not a supply and it was neither an economic activity in its own right nor part of the economic activity of the Trust (see paras. 42–43).
The Trust was therefore entitled to make a s. 41(3) claim and HMRC's appeal was dismissed.
Like the UT before, it the Court of Appeal reached a logical decision based upon the legislation as drafted. Before both courts, in addition to its “main argument” that the Trust was engaged in economic activity, HMRC argued that the effect of the De-Supply Order was, variously, unfair, illogical or contrary to EU law. Without reaching a conclusion on these points, both courts advised that the answer to these issues was to amend the legislation.
Peter Mantle (instructed by the General Counsel and Solicitor to HM Revenue and Customs) appeared for the appellants
David Scorey QC (instructed by Deloitte LLP) appeared for the respondent
[1] As part of a salary sacrifice scheme, the Northumbria Healthcare NHS Trust (“the Trust”) provides its employees with motor cars. The issue on this appeal is whether the Trust is entitled to a refund of the VAT which it incurred when it acquired the cars. The Upper Tribunal (“the UT”) (Henry Carr J and Judge Sinfield) held that it was. With the permission of the UT, HMRC appeal. The decision of the UT is at [2019] BVC 511.
[2] The Trust was established under the Health and Social Care (Community Health and Standards) Act 2003. The Trust's statutory activities include the provision of hospital and community health services in North Tyneside and hospital community, health and adult social care services in Northumberland. The carrying out by the Trust of its statutory functions is regarded as a non-business activity for VAT purposes.
[3] The Trust offers car leasing to its own employees, employees of a number of other NHS Trusts, and to employees of other public sector organisations under salary sacrifice arrangements. There is a public sector car leasing framework in place which enables the Trust to obtain leased cars on favourable commercial terms. Having leased a car on favourable terms, the Trust then enters into a back-to-back lease of the same car with one of its employees. Car maintenance and repair is included in the leases offered by the Trust to its employees.
[4] The Trust provides the car leasing services to other entities under the brand “NHS Fleet Solutions”. The Trust currently has approximately 21,000 vehicles within NHS Fleet Solutions and makes supplies to employees of about 170 public sector organisations.
[5] Where the Trust leases a car to another NHS Trust in the same divisional VAT registration, an employee of that other NHS Trust is regarded, for VAT purposes, as an employee of the Trust and the same VAT treatment applies.
[6] As part of the arrangements, the employees who lease cars from the Trust under the car scheme are entitled to use the cars for the term of the lease. They may use them for private use in addition to using them in the course of their employment activities with the Trust, although the Trust cannot compel their use for the latter purpose. When employees use the cars in the course of their employment, they are reimbursed for their mileage costs by the Trust.
[7] The Trust's claim to a refund of VAT which it incurred on the acquisition of cars is made under section 41(3) of the Value Added Tax Act 1994 (“VATA”). This is a domestic provision which does not owe its origin to EU law. The purpose underlying the enactment of section 41 was to encourage public authorities to “outsource” the provision of services. When they perform services in-house, using their own employees, they incur no VAT. If they were to outsource those services, they would be exposed to having to pay VAT charged by the outside contractor. That was seen as a disincentive to outsourcing the provision of services. Hence the need to provide for a refund of VAT. That sub-section provides:
(3) Where VAT is chargeable on the supply of goods or services to a Government department, on the acquisition of any goods by a Government department from another member State or on the importation of any goods by a Government department from a place outside the member States and the supply, acquisition or importation is not for the purpose –
- of any business carried on by the department, or
- of a supply by the department which, by virtue of a direction under section 41A is treated as a supply in the course or furtherance of a business,
then, if and to the extent that the Treasury so direct and subject to subsection (4) below, the Commissioners shall on a claim made by the department at such time and in such form and manner as the Commissioners may determine, refund to it the amount of VAT so chargeable
[8] The Trust counts as a government department: section 41(6) and (7). The claim under section 41(3) is not a deduction of input tax. It is a claim for a refund of VAT which is outside the usual method of offsetting input and output tax.
[9] The Treasury's direction is dated...
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...a recent decision of the Court of Appeal published after the hearing in this case: HMRC v Northumbria Healthcare NHS Foundation Trust [2020] EWCA Civ 874, at [7] and [8], describing the claim under section 41(3) as “a claim for a refund of VAT which is outside the usual method of offsetting......
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The King (on the Application of Gloucestershire Hospitals NHS Foundation Trust) v The Commissioners for HM Revenue and Customs [2023] UKUT 00028 (TCC)
...to implement the COS regime by a Treasury Direction and its purpose was explained in more detail in R (Northumbria NHS Trust) v HMRC [2020] EWCA Civ 874; [2020] STC 1720 (‘Northumbria’) at “7. The Trust's claim to a refund of VAT which it incurred on the acquisition of cars is made under se......