Revenue And Customs v Northumbria Healthcare NHS Foundation Trust

For VAT purposes, a salary-sacrifice arrangement may be treated as involving no supply, with the consequence that the employer’s related activity is not an economic activity where there are no actual or intended taxable supplies. The concepts of supply and economic activity are distinct, but they cannot be decoupled under the general VAT scheme. A deeming provision must be applied to the inevitable consequences of the fictional state of affairs it creates, subject to its statutory purpose and without producing unjust, absurd or anomalous results unless clear language requires that outcome. Where a public body acquires goods to provide them to employees under such an arrangement, and its other activities are non-business activities, the acquisition is not for the purpose of a business carried on by it and may qualify for a statutory VAT refund.

The Trust operated a salary-sacrifice car scheme. It acquired vehicles under leases and provided them, with maintenance and repair, to employees, who could use them privately and in their employment. The Trust claimed a refund of acquisition VAT under section 41(3) of the Value Added Tax Act 1994, relying on the Contracted Out Services Direction.

The Upper Tribunal held that the De-Supply Order meant that the employee provision was not a supply and therefore was not an economic activity. It concluded that the acquisitions were not for the purpose of a business carried on by the Trust: [2019] UKUT 170 (TCC), [2019] STC 1532. HMRC appealed, arguing that supply and economic activity were distinct and that the Trust’s car scheme remained a business activity.

1. Appeal dismissed. The Upper Tribunal had applied the correct legal test and was entitled to evaluate the Trust’s overall activities as a question of fact. Its decision was therefore upheld.
2. The De-Supply Order provided that the employee’s private use of a motor car under a salary-sacrifice arrangement was to be treated as neither a supply of goods nor a supply of services. The deeming provision applied to the employee provision, not to the Trust’s antecedent acquisition of the car.
3. Following the principles explained in Fowler v HMRC, a deeming provision must be construed by reference to its purpose and applied to consequences which inevitably follow from the statutory fiction, but not to effects clearly outside its purpose or to unjust, absurd or anomalous results unless clear language compels that outcome. Here, treating the employee provision as no supply meant that the relevant activity could not constitute an economic activity in the VAT sense where there were no actual or intended taxable supplies.
4. The distinction between supply and economic activity did not assist HMRC. A supply for consideration is a necessary, though not sufficient, condition of economic activity. The CJEU authorities confirmed that an activity can constitute economic activity only where it corresponds to a chargeable event under article 2 of the Principal VAT Directive. Ghent Coal Terminal did not establish otherwise: it concerned goods acquired for intended taxable transactions which were later frustrated by circumstances beyond the taxable person’s control.
5. The Trust’s separate leasing business supplying cars to outside organisations was left out of account by agreement. Its core healthcare functions were non-business activities. The cars acquired for the employee scheme were therefore acquired for a non-business purpose and qualified for refund under section 41(3) and the COSD. The court expressed no concluded view on whether input tax might otherwise have been deductible on the antecedent acquisition.
6. The court also recorded, without deciding the point, that HMRC accepted the Trust could rely on the De-Supply Order despite its alleged incompatibility with EU law. An interpretation bringing the Order into conformity with EU law was ultimately accepted to be impossible on the argument presented.

• Court of Appeal (Civil Division) — appeal from the Upper Tribunal (Tax and Chancery Chamber), which had allowed the Trust’s VAT refund position: [2019] UKUT 170 (TCC), [2019] STC 1532. The Court of Appeal dismissed HMRC’s appeal.