NHS Ayrshire and Arran Health Board v The Commissioners for HMRC

Whether construction of a distinct part of a building qualifies for zero-rating under item 2, Group 5, Schedule 8 of the Value Added Tax Act 1994 requires applying the relevant residential categories and the hospital exception in their context. Under Note (10), a part need not be assessed in isolation: the functions of the wider building, the reasons occupants are accommodated there and the interdependence of its areas may inform the inquiry. Sole or main residence does not by itself establish a relevant residential purpose. The statutory category and any exception must still be satisfied. Integrated medical treatment may mean that an accommodation wing forms part of a hospital or similar institution, even if patients sleep there and receive personal care.

NHS Ayrshire and Arran Health Board built the National Secure Adolescent Inpatient Service, a medium-secure mental health facility for young people detained for treatment. It sought zero-rating for construction work on the facility’s 12-bedroom accommodation wing, arguing that the wing was a distinct part intended solely for a relevant residential purpose under item 2, Group 5, Schedule 8 of the Value Added Tax Act 1994. HMRC refused the claim. The First-tier Tribunal dismissed the appeal, finding that the complex was a hospital or similar institution and that treatment continued in the wing: [2025] UKFTT 502 (TC). The Health Board appealed on three grounds concerning the wing’s status as part of a building, the Note (4) categories and the hospital exception. It also sought to add shared kitchen and dining areas to the claimed part. The central issue was whether the wing was intended for use solely for a relevant residential purpose.

1. The application to add the shared kitchen and dining areas was refused. A new point may be raised on appeal only where the other party will not risk prejudice. Permission should not be given lightly where the point requires further evidence or materially changes the case. Here the evidence and cross-examination had focused on the bedroom wing; admitting the new argument would require further evidence, an adjournment and a further hearing. It would disrupt the appeal and permit the case to be relitigated. The tribunal also relied on the caution in Fage UK Ltd and another v Chobani UK Ltd and another [2014] EWCA Civ 5 against treating a trial as a rehearsal for a second attempt.

2. Ground 1 failed. Read fairly, the FTT treated the bedroom wing as a distinct part of the complex and assessed its intended use as such. It did not decide that the wing could not be a part of a building. The authorities relied on by the Health Board did not establish criteria for identifying a part of a building: neither University Court of the University of St Andrews v Customs & Excise Commissioners (2005) VAT Decision 19504 nor New Deer Community Association v HMRC [2014] UKFTT 1028 (TC) had decided that question.

3. Notes (4) and (10) require a contextual assessment. The tribunal must compare the relevant residential category with the hospital exception. The ordinary meaning of hospital concerns an institution providing medical treatment and associated care, in contrast to an institution whose principal purpose is personal care. The approach in Fenwood Developments Ltd v HMRC [2005] EWHC 2954 (Ch) demonstrated the importance of that comparison.

4. When Note (4) is applied to a part under Note (10), that part need not be considered in isolation. Its intended use may be informed by the functions of the rest of the building or complex, the context in which occupants are accommodated and the interdependence of different areas. The FTT was entitled to consider those matters here. The decisions in St Andrews and New Deer did not assist the Health Board: the hospital exception was not in issue in the former, and the latter concerned relevant charitable purpose under Note (6), which has no equivalent exception.

5. Sole or main residence does not automatically establish a relevant residential purpose. Notes (4)(a), (b) and (g) also require the relevant area to be a home or institution where the provision says so, and remain subject to the hospital exception. The wing was not a self-standing home or institution; the only institution of which it formed part was NSAIS, a hospital or similar institution. Treatment continued in the wing as part of an integrated course: trained nurses made observations that informed treatment plans, and patients were detained there to receive medical treatment. The FTT was entitled to take account of those facts and the statutory purpose of detention. It made no material error of law. The appeal was dismissed.

1. Upper Tribunal (Tax and Chancery Chamber): The appeal from the FTT was dismissed. The application to include the shared kitchen and dining areas in the claimed part was refused. [2026] UKUT 258 (TCC) .
2. First-tier Tribunal (Tax Chamber): The appeal against HMRC’s refusal of zero-rating for construction services relating to the bedroom wing was dismissed. [2025] UKFTT 502 (TC).