Northumbria Healthcare NHS Foundation Trust v Commissioners for His Majesty’s Revenue and Customs

A public body carrying on an economic activity is excluded from VAT under article 13(1) only where the activity is performed under a special legal regime applicable to public authorities and non-taxation would not cause significant distortion of competition. A special regime requires a legally certain obligation which governs or materially affects how the activity is performed. Guidance, whether internal or external, and the general public law duty ordinarily to follow it do not suffice.

Distortion must be assessed by reference to the activity as such, at a high level of abstraction. It includes actual and real potential competition. Differential VAT treatment of similar competing supplies may distort competition through lower prices, retained profit or deterrence of market entry. Any distortion exceeding the negligible is significant.

The respondent NHS foundation trust charged for car parking at hospital and healthcare sites. HMRC refused its claim under section 80 of the Value Added Tax Act 1994 to recover £267,443 in VAT accounted for between May 2013 and March 2016.

The First-tier Tribunal dismissed the Trust’s appeals: [2021] UKFTT 71 (TC). It held that NHS and Department of Health parking guidance did not constitute a special legal regime and that non-taxation would significantly distort competition. The Upper Tribunal upheld that decision: [2022] STC 1869.

The Court of Appeal allowed the Trust’s appeal: [2024] EWCA Civ 177. It held that the external guidance, combined with the public law duty to follow it absent good reason, created a special legal regime. It also held that HMRC had not proved significant distortion of competition.

The central issues were whether the Trust supplied parking as a public authority within article 13(1) of the Council Directive 2006/112/EC and section 41A of the Value Added Tax Act 1994, and whether non-taxation would significantly distort competition.

1. Appeal allowed unanimously. Lord Hodge and Lady Simler delivered the joint judgment, with which Lord Hamblen, Lord Burrows and Lord Richards agreed. The Court of Appeal was wrong to hold that the Trust acted as a public authority when providing car parking.

2. Article 13(1) of the Council Directive 2006/112/EC is a limited derogation from the general taxation of economic activities. Its purpose is to exclude activities performed by public bodies under a public law regime. Its purpose is not to enable public authorities to retain additional revenue for public services or reduce charges to users. The derogation must be construed strictly, though fairly and without depriving it of effect.

3. The determinative inquiry is the legal way in which the activity is carried out. The activity must be governed by legal conditions applicable to the public body but not to private traders, or involve the exercise of relevant public powers. Its subject matter and purpose are irrelevant. A statutory basis for the body or a general statutory power to undertake the activity does not suffice.

4. A special legal regime requires a legally certain obligation of national law which governs or materially affects the activity. Primary, secondary or tertiary legislation having the force of law may qualify. Guidance does not impose a legal obligation and retains inherent flexibility. Neither external nor internal guidance becomes a special legal regime merely because public law ordinarily requires adherence absent good reason. Allowing guidance to determine liability would undermine legal certainty and fiscal neutrality and could permit a public body or its overseer to determine its own tax status.

5. The Trust’s broad powers under sections 43(2) and 43(3) of the National Health Service Act 2006, the parking guidance and the general duty to follow guidance did not create different legal conditions from those governing private operators. The Trust therefore failed the first operative condition for non-taxable status.

6. Although unnecessary to the disposition, the court would also have allowed the appeal on significant distortion of competition. The inquiry concerns the activity as such, at a high level of abstraction, rather than particular local markets. Actual and real potential competition count. Any distortion greater than negligible is significant, and HMRC bears the burden of proof. No detailed competition-law or expert market analysis is invariably required.

7. Hospital parking and nearby private parking are identical or similar supplies meeting the same consumer need. Differential VAT treatment could permit lower prices, greater retained profit or deterrence of market entry. The First-tier Tribunal had sufficient evidence of actual competition and substantial unmet demand to find a more than negligible distortion. The Court of Appeal’s decision was set aside.

1. United Kingdom Supreme Court: Allowed HMRC’s appeal unanimously and set aside the decision of the Court of Appeal: [2025] UKSC 37.
2. Court of Appeal: Allowed the Trust’s appeal, holding that the parking guidance and duty of adherence created a special legal regime and that HMRC had not proved significant distortion of competition: [2024] EWCA Civ 177.
3. Upper Tribunal: Upheld the First-tier Tribunal’s conclusions on the absence of a special legal regime and the existence of significant distortion of competition: [2022] STC 1869.
4. First-tier Tribunal: Dismissed the Trust’s appeals against HMRC’s refusal to repay VAT: [2021] UKFTT 71 (TC).