NHS Trust wins judicial review claim against HMRC

In R (on the application of Royal Surrey NHS Foundation Trust) v HMRC [2023] EWHC 2354 (Admin), the High Court confirmed in judicial review proceedings that an NHS Trust was entitled to the benefit of a VAT concession, and could therefore reclaim input VAT, in relation to the purchase of certain machines used in radiation therapy for cancer patients.

Background

The Royal Surrey NHS Foundation Trust  (the Trust) is authorised under the National Health Service Act 2006. Its primary purpose is to provide NHS services.

The NHS has a unique structure for VAT purposes. The Trust was part of an NHS VAT division which was not a formal VAT group or divisional registration (under sections 43 or 46, VATA 1994). However, HMRC treated all English NHS bodies as if they were part of the same registration even though they were separately registered and submitted individual VAT returns. NHS Supply Chain, which provides logistics and a central purchasing function for the NHS, was also part of this NHS VAT Division.

NHS Supply Chain purchased two machines on behalf of the Trust, known as Linacs. The Linacs are used in radiation therapy for cancer patients to provide external beam radiation treatments on all parts of the body. 

The cost of Linacs, at the relevant time, was about £4,112,586 inclusive of VAT. NHS Supply Chain did not recover the VAT charged by the supplier on the basis that the machines were goods rather than supplies. It was the Trust's intention to later transfer the Linacs to a subsidiary company so that company could provide services to both the Trust and other NHS Trusts and such a transfer would be a business supply. 

There is a long-standing 1998 VAT concession contained in Note 1/98 (the Concession) that provides a mechanism for a NHS Trust to recover VAT on the purchase of goods procured through a supply chain, provided the goods will be used for taxable business purposes. The Trust therefore sought to rely on the Concession and claimed input tax in respect of the Linacs. 

In June 2019, HMRC denied the Trust's claim for input tax on the basis the Trust did not hold a VAT invoice and NHS Supply Chain had the claim to input tax and at the relevant time neither NHS Supply Chain nor the Trust had an intention to use the Linacs for a business purpose. HMRC relied upon its policy that if input tax was not claimed from the outset, even if the intention changed at a later date, the VAT would not be recoverable. HMRC's position was that NHS Supply Chain needed to have had a business intention at the time the Linacs were purchased. 

The Trust initially appealed HMRC's decision (refusing an input tax refund under VATA 1994) to the First-tier Tribunal (FTT). That appeal was withdrawn and a further decision under the terms of the claimed Concession was invited by the Trust from HMRC. Thereafter the Trust relied on the Concession. Its claim was refused again by HMRC on 31 March 2021. HMRC denied there was any concessionary regime that would allow the recovery of input tax in the circumstances of the Trust's case. 

As a result, the Trust brought a claim for judicial review in the High Court.   The Trust's application for judicial review concerned whether the Trust was entitled to the benefit of the Concession in respect of its onward supply of the Linacs. 

High Court decision 

The Trust's claim for judicial review succeeded. 

The Court concluded that the Trust was entitled to the benefit of the Concession and directed that HMRC's decision of 31 March 2021 be quashed.

Essentially, the Trust's claim for judicial review was that HMRC had: 

(i) failed to give due effect to the concessionary regime/misdirected itself as to the effect of the Concession;

(ii) failed to take into account a relevant consideration, i.e. that at the time of the supply of the Linacs, the Trust's intention was to use them for business purposes; and 

(iii) taken irrelevant considerations into account, i.e. the supposed intention of NHS Supply Chain when the Linacs were supplied; that the Linacs were capable of being used for a purpose other than a business purpose.

Firstly, the Court considered whether the Trust had an alternative remedy in the FTT and if so, whether its claim for judicial review should therefore be dismissed. The Court determined that it did not. The question before the Court was whether or not the Trust could bring itself within the terms of the Concession, it did not concern input tax recovery under VATA 1994. Accordingly, the FTT did not have jurisdiction. 

Secondly, the Court considered whether it ought to disregard evidence in the judicial review that was not before the HMRC decision-maker in 2019 or 31 March 2021, when HMRC made decisions as to the Trust's claims. The Court concluded that, for various reasons but in particular because of the scope of the correspondence, and HMRC's responses, it would be unjust to do so. In any event, the more recent material was not inconsistent with the earlier material before the FTT and HMRC. 

Thirdly, the Court considered whether HMRC failed to give due effect to the Concession or otherwise misdirected itself as to the effect of the Concession. The Court held that HMRC had failed to consider the decision within the correct framework of the Concession. The reliance upon NHS Supply Chain's intentions was wrong.  The Court commented at paragraph 112(iv) that:

"In the present case had HMRC asked itself the correct questions, and correctly analysed the statements made to it by the Trust, they could only have concluded that the Trust's intention at the relevant time, namely at the time of the supply of the goods, was as to a business use. That evinces an error of law in misapprehending the meaning of the Concession, a failure to address the correct analysis, namely not asking themselves the right questions about the time of supply, even though the Trust had asserted that time of supply was the test. It also involved the error of assuming, that "purchase" was synonymous with "supply" in VAT terms and had been used in that sense. After the decision, the erroneous analysis of the Concession continued; the evidence in the judicial review made the contrary position quite unarguable".

Comment

This decision will no doubt provide some welcome clarity for other NHS Trusts who  find themselves in similar circumstances to the Trust in this case. 

Although fact specific, the decision provides an example of when a taxpayer may be successful in applying for judicial review of an HMRC  decision. Such a remedy should always be given careful consideration by taxpayers when public law arguments are available to them. 

The judgment can be viewed here.