In a significant judgment today, the UK Supreme Court has ruled in favour of HMRC in its long-running dispute with Northumbria Healthcare NHS Foundation Trust (“Northumbria”) about VAT on hospital car parking charges. This decision upholds HMRC’s position that income from NHS-operated car parks is subject to VAT, with broad financial implications for NHS Trusts across England.

Background

Car parking income generated by NHS Trusts has always been treated as subject to VAT at the standard rate (currently 20%). In February 2024, the Court of Appeal ruled in favour of Northumbria’s position that the income is non-business. It found that parking services provided by NHS Trusts fell outside the scope of VAT because they were supplied under a “special legal regime” and did not distort competition. However, HMRC appealed to the Supreme Court, which has now overturned that decision.

Key Findings

The Court found that while NHS Trusts must follow government guidelines on pricing and concessions, these are flexible recommendations, not legally binding rules. As such, the NHS is not operating under a “special legal system” for the income to be treated as non-business for VAT purposes.

Hospital car parks also compete directly with nearby private ones, as both offer the same basic service, i.e. convenient parking. If the NHS avoided VAT, it could lower prices or keep more profit, giving it an unfair edge, especially when demand far outstrips supply. This real risk of distorting competition means VAT must apply.

What This Means for NHS Trusts

This ruling creates a binding precedent requiring NHS Trusts to continue charging and accounting for VAT on car parking income. Trusts that had paused VAT payments or submitted refund claims based on the earlier Court of Appeal ruling will not recover that VAT and will now need to consider withdrawing or amending their claims.

The judgment means Northumbria’s claim will not be paid. Nor will the claims of around 70 NHS Trusts awaiting this judgment, which amounted to up to £100 million.

Effect on Car Park Construction Costs

The decision affirms that NHS car parking remains a taxable business activity, allowing Trusts to continue recovering VAT costs on construction and operational expenses. For those with substantial investments in car park infrastructure, this mitigates the risk of large VAT adjustments under the Capital Goods Scheme.

Trusts planning new car park developments can proceed with greater clarity, knowing VAT incurred on construction costs should be recoverable. However, they should still carefully assess contractual and operational models, particularly where third-party involvement is contemplated.

Recommended Next Steps

NHS Trusts should now take the following actions following the Supreme Court ruling:

• Ensure VAT is correctly accounted for on car parking income going forward.
• Consider withdrawing or revising any outstanding claims for VAT refunds on past income.
• Review input tax recovery assumptions on car park capital expenditure.
• Evaluate Partial Exemption methods in light of continued business treatment.
• Confirm third-party contracts align with VAT obligations and determine if restructuring is required.

Need Support?

The NHS VAT team at CRSTAX is available to help Trusts assess the implications of this ruling and provide ongoing VAT compliance support.

Read more on Car Parking

The First Tier Tribunal (FTT) has published its findings in respect of North Lincolnshire and Goole NHS Foundation Trust appeal.

This is encouraging news for NHS Trusts which still have outstanding ‘Fleming’ VAT claims which are dependent upon HMRC accepting ‘entitlement’.

We submitted claims to HMRC on our client’s behalf back in 2009, for various types of overpaid or under recovered VAT dating as far back as 1973. This was following the judgment of the House of Lords in the joined cases of Fleming/Condé Nast in 2008, which found that the way HMRC introduced the capping provisions (back in 1996 and 1997) had been unlawful at the time. These were commonly referred to as the ‘Fleming claims’.

Some of these claims have already been paid in part, in particular those for overpaid catering output tax, but only where HMRC agreed the quantum of the claim and the entitlement from the date of the Trust formation.

Claims for earlier periods were rejected on the grounds that HMRC did not believe the entitlement for earlier periods relating to predecessor NHS bodes was transferred to the Trusts.

Other types of claims were rejected in full, in particular, those for input VAT on drugs and prostheses supplied to private patients, (referred to as Wellington/BUPA VAT claims). This was following the Nuffield FTT decision in 2013 where HMRC’s argument that these claims were invalid was upheld. The Nuffield appeal was the lead case for all appeals against HMRC’s rejection of the drugs and prostheses claims, including NHS appeals.

The North Lincoln and Goole case was the lead case dealing with the question of whether there was a transfer of rights to VAT claims from predecessor bodies to the current NHS Trust.

Therefore, any Trust with an outstanding claim which is dependent upon the entitlement issue could now receive a further VAT refund.

HMRC could still seek to argue that this does not set a precedent, but we will let you know as soon as HMRC’s view of the decision to the wider NHS becomes known. If HMRC does now agree that this decision has wider application for the NHS, we will make arrangements to agree the quantum of the claims now due to our clients.

As most NHS bodies are aware, HM Revenue & Customs (HMRC) has been actively reviewing the interpretation of the Treasury Direction COS VAT guidance.  This is following the aborted attempt earlier this year to impose the more restrictive Government Department (GD) rules on the NHS.  At the time, HMRC was forced to back down and instead consult with the NHS before making any changes.

It was originally anticipated that the revised guidance following the consultation would be part-published in November 2014 incorporating both GD and NHS bodies, however, we have now been informed that the publication date has been put back to mid-January 2015.

Specific items which could be subject to change include:

COS Heading 52 – Professional Services

This is likely to be restricted to ‘advice’ or ‘opinion’ only.  NHS bodies may no longer be able to recover VAT on consultancy costs for implementing changes, including legal representation or professional fees related to capital projects.

COS Heading 31 – Laboratory Services

Following the GSTS Tribunal decision earlier this year that pathology testing involving patient samples is exempt from VAT, the scope of this heading is being reviewed.  This may mean that VAT charged on outsourced laboratory facilities (including equipment, management, reagents, maintenance, training, etc.) may no longer be eligible for recovery under this heading.

COS Heading 45 – Healthcare Facilities

In a letter recently issued to the HFMA, HMRC implied that a ‘healthcare facility’ was a physical building, unit or area within a building which is run/operated by the contractor which enabled the NHS body to occupy the facility to deliver healthcare.  This definition would mean that COS heading 45 would still cover PFI hospitals and other similar facilities, but may well exclude managed facility contracts which are heavily based upon the provision and availability of equipment and consumables.
Other areas potentially subject to change include:

COS Heading 10 – Catering Services

This may now be extended to supplies of catering staff.

COS Heading 14 – Computer Services

This may exclude private data lines, which were specifically included in the previous NHS guidance.

Our initial thoughts are that the anticipated changes will significantly restrict the scope for VAT recovery of NHS bodies, many of which are already in serious financial difficulty.  We will issue a further update once we have more information.

HM Revenue & Customs (HMRC) issued a letter to the NHS in December 2013 stating that the proper tax point (time of supply) rules should be applied to Contracted-out services (COS) VAT recovery.  This meant that COS VAT should be claimed on the VAT return for the period in which the invoice is dated, or by the annual deadline at the latest.  In the same letter, the annual COS deadline was extended a further month to 31 July.

Historically, NHS bodies have recovered COS VAT on a return relating to either the period in which the invoice is dated (registration), the period the invoice was approval for payment, or the period in which the invoice is paid.  This has meant that if an invoice is in dispute, the VAT may not have be claimed until several months or even years after the tax point date.

Following various representations made about the timing of HMRC’s proposed changes and the lack of any transitional period, HMRC has now ‘relaxed’ this tax point rule for the time being.  This means that NHS bodies can continue to recover COS VAT at the time an invoice is paid, irrespective of the tax point date.

HMRC has told us that as part of the ongoing review of NHS and Government VAT following the recent publication of interim guidance, further guidance will be issued in the coming months making it compulsory for the NHS to adopt the tax point rules, with a likely start date from April 2015.

We would therefore recommend that the tax point rules are adopted as soon as possible, to ensure that COS VAT on invoices dated prior to April 2014 but not yet approved or paid is not lost.  Any NHS body which has already adopted the tax point rules should continue to use this method.

In summary, at present any COS VAT incurred on invoices paid within the 2013/14 financial year must be claimed by the 31 July 2014 deadline irrespective of the tax point.  Going forward, it is recommended to adopt the tax point rules as soon as possible to avoid any potential loss of VAT recovery.